As many of you have heard me say in a variety of industry speaking engagements over the last two months, valuations in the pest control market have peaked and will likely remain elevated for the next six months or so.
Rentokil’s acquisition of Steritech for $425 million (2.8x revenue / 28x EBITA) in cash likely represents the high water mark in terms of valuation and pricing.
John Whitley, founder of Steritech, has come full circle as he used to run Rentokil North America decades ago before founding Steritech. It’s awesome to be able to sell your business to your former employer for $425 million in cash and I salute John for building a phenomenal company — and after running it for decades — to exit at the exact right moment.
If he would have sold this business two years ago, he would have been lucky to get $250 million for it — what a huge difference two years makes.
Below is Rentokil’s commentary on the transaction. We’ll discuss this transaction more in the coming weeks.
Rentokil Initial plc enters into an agreement to acquire The Steritech Group, Inc. (“Steritech”) – one of the leading pest control businesses in North America, operating in both the United States of America and Canada – further accelerating the growth of its pest control business.
Highlights
- The Company has agreed to acquire Steritech for $425m in cash, subject to US regulatory approval.
- Steritech is a high quality provider of pest control services with a US national footprint. It is also the market leading provider of brand standards auditing services in North America.
- The acquisition strengthens our position as the number three pest control business in the US, a $7.5bn market which accounts for 50% of global pest control services and is a key strategic market in our Growth quadrant.
- Rentokil also becomes the third largest pest control company in Canada, creating a competitive national business, twice the size of its current Canadian operations.
- The Company’s North American business now has annual revenues of $0.8bn and becomes its largest operation.
- Steritech provides a highly complementary geographic fit – building route density and scale in line with the Company’s strategy for profitable growth.
- The brand standards auditing business provides a new dimension to Rentokil Initial’s pest and hygiene services with potential for global leverage.
- Steritech has a well-deserved reputation for market leading quality standards and technical know-how. The Company sees a strong cultural fit with emphasis on customer care as evidenced by high levels of customer retention.
Strong financial case based on year three cost synergies estimated to be at least $25m and good revenue synergies.
The transaction is expected to deliver profit before interest, tax and amortisation (“EBITA”1) of $25m – $30m in 2016 and to achieve EBITA returns in excess of 12% by 2018. - Andy Ransom, Chief Executive of Rentokil Initial plc, commented: “For some time we have been pursuing a growth strategy in North America, the world’s largest pest control market, with Steritech at the top of our target list. It has an outstanding management team with a proven track record and a reputation founded on technical expertise and a premium service, similar to ours. It is also highly geographically complementary to our existing US business.
“This is a rare opportunity to acquire a high-quality business with national scale in this key target growth market. The deal is in line with our growth strategy and will be transformational for Rentokil in North America, providing us with the opportunity to further accelerate our revenue growth and significantly enhance margins.”
Rich Ennis, CEO of Steritech, commented: “Steritech’s success has largely been based on great people delivering world class service to customers. Rentokil’s strong culture and focus on people make them the perfect fit for Steritech’s people and customers. I believe that the future is bright for the new organization.”
Steritech Overview
Steritech, which is headquartered in Charlotte, North Carolina, was established in 1986 and is one of the leading pest control businesses in North America. Steritech is engaged in commercial pest control (approximately $97m of revenue) and brand standards auditing (approximately $53m). It has a high quality management team with particular strengths in national and large account sales. We plan to retain all key Steritech management in the combined business.
In addition to its core pest control operations, Steritech is North America’s market leader for brand standards auditing to the restaurant and food retail industries. This service is delivered through onsite audits covering food safety, operational excellence and quality of customer service.
Brand standards auditing is an attractive additional business line which has similar customer segments to pest control. These services are delivered by highly trained consultant auditors who help customers to deliver consistently on their brand promises by providing a third party monitoring mechanism. This evaluates whether their food preparation, food delivery and customer experience criteria are being met. Further, these audits identify where corrective action is required. The brand standards business has grown organically by a compound annual growth rate (“CAGR”) of 14% since 2013. Rentokil does not currently service this market (currently worth $325m p.a. in North America), and so the acquisition of Steritech provides the Company with access to a relatively under-developed market with high growth potential both in North America and eventually internationally through leverage of Steritech’s North American relationships and Rentokil’s international footprint.
The brand standards and pest control businesses are highly complementary providing significant opportunities for increased lead generation across the combined business.
Financial Performance
Steritech has a strong track record of revenue growth and customer retention with revenues growing by a CAGR of 10% since 2013.
Steritech’s reported EBITA in the year ended March 2015 was c$10m. Based on pro forma adjustments the Company estimates underlying2 EBITA for the year ended March 2015 to be $15m. Rentokil expects to be able to increase EBITA to over $50m by 2018 through cost synergies of at least $25m including back office and operational cost savings across Rentokil Initial’s combined North American business with the remainder of profit growth through revenue growth and synergies. Steritech operates on an “asset-light” basis with gross assets at 31 March 2015 amounting to $38m.
Significant Opportunity to Accelerate Growth and Margins
Rentokil Initial has been pursuing a strategy of growth in the highly attractive North American pest control market for several years. The Company’s pest control business in North America has grown by a CAGR of 15% since 2006 through both strong organic growth and acquisitions. The acquisition of Steritech provides an excellent opportunity for accelerated revenue growth in our North American business organically and through synergies including national accounts sales, increased jobbing work and the provision of new services to existing customers.
The acquisition increases our scale in North America, creating a business which, combined with the recent acquisition of Anderson Pest Solutions in Chicago (announced on 28 August 2015), now has annual revenues of $0.8bn. This will help the Company in its ambition to achieve significantly enhanced margins through leverage of head office costs, reductions in branch level operational administration, better procurement terms, increased route density, improved service technician productivity and field management span of control. The strong geographical fit enables the Company to infill existing low density states in North Carolina and South Carolina, as well as build density in the West, Midwest and Northeast.
Transaction Overview
The transaction will be financed through existing cash resources and a new debt facility which provides the Company with the opportunity to borrow up to £300m, maturing in 2018, at an interest rate of 1.5%, resulting in interest costs relating to this transaction of £4m in 2016. The transaction is expected to close in the fourth quarter of 2015 upon satisfaction of certain customary conditions, including Hart-Scott-Rodino anti-trust clearance.