Will Rentokil Shareholders Take Bid Bait?

Sir Gerry Robinson's interest in troubled hygiene services group Rentokil pushed the share price up 10% on Monday. But "will Rentokil shareholders really take the bait?" asks Robert Cyran on Breakingviews.com.

The company is a "poor buyout candidate." Buying the group would cost a buyer £4.7bn, assuming a 30% premium to its pre-bid share price, and with its debts included. But there isn't much in the way of asset value to back up a leveraged bid less than £700m in tangible assets, and "negative shareholders' equity to the tune of almost £600m". And let's not forget the £184m pension gap.

But the firm "spits out lots of cash", which means it could take on "at least some more debt", cutting its tax payments. And the business is "ripe for a turnaround."

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Any bid would likely take the form of "exchanging 1 Rentokil share for 0.9" shares in Raphoe, Sir Gerry's investment vehicle, says Barclays Stockbrokers, with Raphoe "effectively becoming the new' Rentokil".

But Rentokil's troubles will be tough to "overcome quickly as they stem from a long period of underinvestment in the business." And though there is "a chance" a private equity house might make a cash offer, Barclays puts this at less than 50%.

And of course, recent appointee Doug Flynn has yet to announce his first set of results, due Thursday 25th August. If they are good and he has a credible strategy, "the bid story will fade." Bad results would support the bid story, but investors then need to believe "Sir Gerry can grow a business in a worse state" than previously thought.

The Raphoe deal may be "superficially" attractive to shareholders, who would get some cash and "retain most of the upside" if a turnaround is achieved, says Cyran. But although details are unclear, it "looks like Robinson wants a large slug of the new company's equity" in return. His model will only work "if shareholders are completely fed up with existing management".