Rentokil abandons TFM ambitions, Interserve Transforms

Interserve’s £250m acquisition of Rentokil Initial’s Initial Facilities activities marks landmarks for both support services groups. For Rentokil it is the acknowledgement that, despite trying hard over recent years, they have not been able to secure a landmark acquisition in the Total Facilities Management (TFM) space which would enable them to ‘mix it’ with the big boys. In particular, they have struggled to acquire a technical services business of scale to round out their existing ‘soft’ services offer and to further leverage their dominance within the Pest Control, Hygiene and Workwear sectors. From a strategic perspective, there is logic to Rentokil’s decision that Initial Services does not fit the ‘route-based’ services model of their other three divisions but my perspective is that they have simply not found the right transformational deal to enable them to build and offer a full-fledged TFM offer.

On the other hand, Interserve has been threatening to make a sizeable strategic acquisition in the facilities services space for some years, after a period of deep introspection following its unsuccessful tilt at Mouchel. With structural pensions issues largely resolved and a solidly performing public services sector core, the Initial Services deal potentially marks a new spell of M&A activity from Interserve. A key driver for this deal must be the strategic acknowledgment at Interserve that growth may be easier to come by in the UK’s private sector rather than public sector over the next two to three years. Much of Interserve’s focus – and recent robustness – has come from its strong public sector representation. Initial Services now provides Interserve with an enlarged private sector presence (Interserve can now claim to be a ‘top three’ UK provider) and a potentially compelling platform for further acquisitive growth across the commercial market.

From a valuation perspective, Rentokil appears to have secured a sensible exit valuation. Initial Facilities delivered a £25.8m adjusted EBITA on revenues of £534.0m in 2013, which implies 9.7x historic EBITA multiple for a larger ‘soft’ service focused service provider. Synergies and the presumption of an improved EBITA performance in 2014 will bring the actual EBIT multiple paid by Interserve down and most probably makes the acquisition earnings accretive fairly quickly.

For owner managed businesses contemplating ax exit in 2014, the ramifications of this deal are mixed. Two potentially acquisitive UK groups for niche facilities services groups, in particular ‘hard’ service providers, have now become just one – and Interserve may well be out of the market for six to nine months as it digests its new prize. However, Rentokil’s withdrawal from the TFM market also demonstrates how difficult it has become to source acquisitions of strategic scale in the technical services sector – and how potentially valuable those businesses, and their smaller brethren, can be going forward. As we saw in 2013 with the Norland Services acquisition, scarcity carries a premium.

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