The proposed acquisition of Cannon Hygiene Ltd by Rentokil Initial PLC (LON:RTO) is being put the wringer by the Competition and Markets Authority (CMA).
The CMA said that if the merger goes ahead, the companies, which are both in the top three specialist providers of products and services found in wash-rooms across the UK, could face very limited competition in the sector.
READ: Rentokil Initial trades well in first quarter despite delayed start to the spring pest season in the US
Rentokil and Cannon have until June 25 to offer a solution to the CMA’s concerns, otherwise, the merger will be referred for a more in-depth investigation.
Rentokil acquired Cannon Hygiene in January of this year, gaining nine hygiene businesses in nine countries; the CMA review only relates to the UK part where Rentokil has been ordered to continue running it as a separate business pending the outcome of the CMA's investigation.
In its first-quarter update, Rentokil reported that its Hygiene division's ongoing revenue rose by 29.3% year-on-year, driven by the acquisitions of Cannon Hygiene and CWS Italy. Cannon Hygiene in the UK has annual revenues of around £25mln and profits of about £1mln.
Credit Suisse seems to regard the Rentokil Initial laundry and wash-room business as a sideshow and has increased the price target from 330p to 375p.
“Pest control is key”, the broker said as its 2018 to 2020 earnings per share (EPS) estimates rose 2-6% to reflect near-term foreign exchange effects and higher forecast margins in North America in the longer term.
“Pest Control is the core of the business, representing 69% of 2018E EBITA (up from 38% in 2013). We expect the division to grow 5-6% organically, supported by low double digit-organic growth in the Emerging markets. Margins will benefit from increased density and best practice deployment, particularly in the US,” Credit Suisse predicted.
“We forecast 16.7% EBITA [earnings before interest, tax and amortisation] margins in North American Pest Control and 16% in the region (including Ambius) compared to the regional target of 18%. That compares to c.8-9% margins in North America in 2013. If the company were to reach its 18% target it would add c.8% to group EBITA in 2020 with 60% of this resulting from higher-margin and the remainder higher revenues,” it added.
Shares in Rentokil rose 0.1p to 350.3p in the first hour of trading.