Tim Mulrooney: [00:00:00] When Rentokil comes out with a $55 stock price with their offer, they're saying, “We're offering you 50% upside to your current stock price.” You go tell your shareholders that you said “no” to that. Go ahead. See what happens.
Patrick Baldwin: Congratulations, Dylan.
Dylan Seals: Congratulations Patrick, episode 80. Unbelievable. You and Paul have gosh, 80 episodes plus bonus buzzes plus video content. Holy smokes. What are you guys doing over there?
Patrick Baldwin: I'm picking up what you're putting down, cause, Dylan, you and your team are crushing it. And this is a special one. This is the one that everyone's waiting for. It's one thing for me and Paul, just to sit here and what Paul would say, “bloviate” about it. We actually brought Tim Mulrooney on here. So, the two of them could have an adult conversation, and I could just sit here and be quiet.
I learned a lot. So, I'm super excited about this one learned a lot. So, December 14th, Rentokil announces a seven-and-a-half-billion-dollar acquisition of Terminix. If everything comes through, right? So that's what they want to do. And then we recorded this episode on Monday, January 10th. This episode is going out Thursday, January 20th.
So, you'll hear percentages and dollars and deal risk spread and all this yada yada yada, yada, yada, yada. But Dylan, this is a big deal.
Dylan Seals: Seven and a half billion dollars. Patrick. I think the reason you're so excited is because Terminix acquired your company last year and you feel responsible for some of that. Is that what I'm hearing?
Patrick Baldwin: I like to think I'm the crown jewel of pest control. All right. Well, let's step into the boardroom with Tim Mulrooney.
Dylan Seals: Let's do this, Patrick.
Patrick Baldwin: Paul. I know there have been more questions than answers on this one. You pulled episode 15 guest back in. Tim Mulrooney—Wall Street equity analysts from William Blair. He's back in the board room.
Paul Giannamore: Welcome back, Tim.
Tim Mulrooney: Thanks for having me back, guys. It’s been about a year. Glad to be here.
Paul Giannamore: Glad to have you. So, Tim, you and I had talked about this for a while, getting you back on The Buzz to enlighten us in the audience. And it looks like we picked a really good time to do this because you just fired off a—probably one of the lengthiest research reports I've seen you write in a while.
Tim Mulrooney: Yeah. So, we had a lot of inbounds from clients, as you could imagine, related to this proposed acquisition from Rentokil for Terminix. And so, what we try to do is collect all these questions and answer as many as we can in the note. And it's gotten a lot of positive feedback so far, we just put it out this morning. So it was good timing with the podcast here.
Patrick Baldwin: I was actually able to read it, but you know, if I can read it, other people can understand. It was, what, just under 30 pages? Fortunately, it had lots of pictures and graphs, and you left me a little color-by-number area. So, thanks.
Paul Giannamore: A lot of pictures and graphs. I liked it.
Patrick Baldwin: Page one is where I stopped. I was like “Summary. Got it. Thanks Tim.”
Tim Mulrooney: That's what we try to do, Patrick, is put it all up front and then read the rest if you want to. But we've done this before kind of a regional density analysis. Our hope is that it's a little more robust than some of the other stuff that's out there on the sell side. We collected the locations of the top 30 pest control companies in the U.S. When the DOJ or the FTC is doing an antitrust analysis, they don’t just look at the locations, as you can imagine, of Rentokil and Terminix and say, “Hey it’s less competitive here or there. They look at everybody which makes a big difference because in the Southeast there's a ton of locations for both companies. But if you include all the other competitors and you combine Rentokil and Terminix, it doesn't look, anticompetitive.
There's a ton of players down there, the HHI index, the Hirschman Herfindahl index, which is what the DOJ, the FTC uses, which is the sum of the squared market shares of all the competitors in a given market or industry when it starts to get above 2,500, that's when it starts to feel moderately to highly concentrated.
And in the Southeast, I don't even think it broke 1,500. So really the way to do this type of analysis is to include all the competitors, not just look at Rentokil and Terminix, that's what our goal was. And that was only one of the two key issues. The other issue was the concentration of national accounts, which I'm sure we'll get into later.
Patrick Baldwin: It’s like a kid in the candy store, man. This guy's excited.
Paul Giannamore: So, before we get into the whole details of this transaction, as we're moving into the holidays, 2021, we see the announcement of the pending deal. Rentokil did it, while all the Brits were out of the pubs, it was very thin liquidity, holiday time trading. Before we get into some of the analysis on the deal.
What’s your high-level take on this transaction, Tim?
Tim Mulrooney: Other than the fact that they ruined my Christmas?
Paul Giannamore: Yes.
Tim Mulrooney: From my perspective, and I said this to my salesforce this morning at the morning meeting, I said, look, “You guys know my feeling on Terminix is, from a long-term perspective, there's a lot of latent earnings power locked into this business that someone's going to unlock whether the right CEO comes along, whether it was Nik or Brett or whoever figures out the code and how to unlock that value or someone like Rentokil comes in and they get to extract that value. At some point, you get the retention rates where they need to be, you get the associated uplifted margins, and there's a lot of value to be unlocked. With Rentokil acquiring this business high-level, from my perspective, they're the ones that have the chance to enjoy the benefits of unlocking that value.
Is it guaranteed? No, it's a big swing and they still have to do the hard work. The hard work is ahead of them, but if they can do it, I think all of the accretion estimates that are out there on the sell side right now saying, oh, Rentokil with the cost synergies, they can get EPS accretion of 15% relative to their current EPS or 17%.
No, it could be above 20% because you don't just get the cost synergies. You don't just get the normal benefits that you get from acquiring a big company like that and rerouting and getting all the density benefits. You also get the natural benefit of turning Terminix around into what it could be. If they can do it, and granted it's an “if”—it's not a guaranteed—but if they can, then Rentokil shareholders will be very happy with the deal—would be my high-level thought.
Paul Giannamore: Do you feel like it's a surprising time for the board of Terminix to make this sort of decision?
Tim Mulrooney: I was surprised. I was surprised because talking to folks who know much more than I do about this industry, like you, Paul, it sounded like Rentokil was not interested in the headache that would be undertaking a turnaround of the size, you know, the magnitude, the scope and scale of Terminix. So, I didn't think that that was in the cards because all of a sudden, Rentokil’s next five years, I was just going to be dominated by this story rather than the story that they have been telling for the previous five years, which current shareholders of Rentokil thought that they were getting. And now all of a sudden, they're getting something else. So, I was surprised by the announcement, but maybe I shouldn't have been, because if you look at where Terminix’s, stock price was heading back in October, November, December with the labor shortage issues, I mean, if you go back and look at their third quarter results, their commercial organic growth at Terminix was down year over year on a very easy comp. It should not have been down year over year. And very specifically, the reason why it was down was because they couldn't find enough people to complete the routes.
If they had the people in place, then their organic growth and commercial would have been up. Now, it's one thing when you don't have enough people and you have to pay a little bit more over, or you have higher turnover costs. It's one thing when you have labor shortage issues and it hurts your bottom line, that's showing a moderate problem, but when you have labor shortage issues hitting your top line, you can't even have the service levels that you want to have, that is indicative of a major problem. And buy-side picked up on that right away. Investors picked up on that stock started going way down when they're trading it 13 times EBITDA. That is the time that you would expect someone like Rentokil or a large private equity shop to step in and say, “Hey, even though they have issues, it's hard not to see the value that you can get by acquiring a company like Terminix.
So yes, I was very surprised. I think investors were very surprised. I know Rentokil shareholders were very surprised because I spoke to a lot of them that day and the subsequent weeks, but maybe we shouldn't have been.
Were you surprised?
Paul Giannamore: Tim's just like you. there were a ton of inbounds here over the last couple of weeks. And one of the things that I kept hearing from institutional investors, a lot of these calls were like, “Paul, last year you predicted this was going to happen.” I don't remember specifically saying that it would be Rentokil, although I did say they were most likely to do it.
I always thought that at the end of the day, Andy Ransom, he's somewhat of a cowboy and he's an M&A guy. And when you look at how Rentokil has grown that business through acquisitions over the years, it's no secret that acquisition targets in the United States have becoming more and more scarce.
There's more and more competition pushing up the price. These guys have had to go through and do a bunch of small deals. When I looked at Andy's announcement of this, Rentokil came out and said, this is a “transformative deal.” My initial gut reaction to that was probably not the most ideal messaging and probably not necessarily the way that, in retrospect, they probably look and say they wish they would have handled that a little bit differently because here we are in very thin holiday trading.
We've got a bunch of European institutions, primarily UK institutions that own Rentokil, they're used to a couple hundred basis points a year of organic growth. They're used to a couple hundred basis points a year of acquisitive growth, all of a sudden, boom, it's a transformative acquisition of a business that they literally know nothing about, but that which they do know about Terminix hasn't been ideal, right?
It's a turnaround. And you know, it was bought by a private equity firm, came back public again, had a lot of issues. So I think there was a lot of confusion around that. And I think the institutions are really trying to get their arms around it. But I think Tim, you and I agree a hundred percent that no matter what we say in the pest control industry about the Terminix brand, it is a phenomenal brand. And I would argue probably one of the best brands, at least from a consumer-facing perspective.
So pursuant to how Andy Ransom and the Rentokil guys look at it, they're getting a phenomenal residential brand. They are able to go in and basically buy a basket of smaller businesses on the relative cheap, because quite frankly, they're not paying much more for this business than they would if they were amalgamating a bunch of smaller businesses. And it's a whole hell of a lot less work.
They're getting termite and residential capabilities that perhaps Rentokil North America doesn't have. And Rentokil quite frankly has a lot more experience, I think, on the commercial side. All around, when I look at it, I think Rentokil is getting capabilities and they’re going to be able to impose some of the capabilities they've developed over the decades on Terminix.
A long answer to your short question, Tim, if I were surprised, I think what would surprise me is the timing of this transaction vis-a-vis the larger discussion surrounding the turnaround. I've been very public in recent years about both my disdain for some of the things that Terminix has done, as well as some areas they've made some strides.
I really liked Nik as a person. I think he was trying to accomplish more things at once than he probably should have. I got an opportunity to spend some days one-on-one with Brett Ponton as he came on board. In fact, Patrick and I even sat down with him and did a Board episode. I felt like he was genuine and sincere.
I felt like he was extremely transparent with us, both off camera, as well as on camera. I kind of looked at it and said, well, maybe we've got a guy here who is taking a long-term approach, not going to try to do too many things at once. And it's going to be painful, right? It's going to be painful for shareholders, but this might be the guy who's going to do the operational turnaround.
Because as Brett stated at our interview, the company from a financial perspective was resilient. Right? They had deleveraged their balance sheet. He was really just digging in, in his first year. And so now all of a sudden to see—it looked like it was finally set up for this operational improvement—and now all of a sudden it's part of Rentokil.
If anything surprised me, it was, hey guys, why now? Isn't this just starting?
Tim Mulrooney: Yeah, I hear ya. And one of the questions I got is why would Brett agree to this? And I don't know what Brett's feelings are about this. I know he's just now getting comfortable down in Memphis. I don't know that he did agree with it. Remember, Brett is one of many board members who ultimately make the decision about whether to sell the company.
And he's not even the chairman of the board. I don't know that this would have been Brett's first choice. I think he probably would have liked to have continued down the path that he was going, but you know, things like this do come up.
Paul Giannamore: That's a question everyone has, which is why would Brett go along with this? But at the end of the day, as you just stated, it really wasn't Brett's decision. He operates at the behest of the board and the board answers to the shareholders. And at the end of the day, I would imagine there was probably some lively debate in the Terminix boardroom.
But if you're Brett, you've got a couple of things going on here in your favor. Number one. You've now got somewhat of a put option out there. You've got some significant time between now and the actual potential consummation date of the deal. So you can really continue to focus on operational excellence, all of your equity incentive stock options, the whole nine yards, are fully vested upon the deal. So you're going to be in a great financial shape. And I think there's still significant uncertainty surrounding whether or not this deal will even be consummated, which I think is going to be a pretty decent portion of our discussion today, gentlemen.
Tim Mulrooney: Yes.
Paul Giannamore: And Tim, I know you've done four months of research in the last two weeks on the topic, so that's what I really want to get into right now.
Tim Mulrooney: Before we do, I just want to highlight a couple of things. Cause you said a lot there, Paul, and I think it's a great point. I mean, Rentokil. Yes. They bought a company, but you could make the argument that they just bought 360 individual businesses because they have 360 branches and 360 different locations.
Especially that one in Waco I heard is like top-notch location.
Paul Giannamore: “Rumors.”
Patrick Baldwin: The rumors are true, Tim. Didn't make the map, but it's here.
Tim Mulrooney: But that is powerful. And like you said, Paul, they acquired Florida pest control. I don't have the deal multiple on that, but I have to think it was above 13 times what they acquired Terminix at. Well, I guess if you're including the synergies, I mean, that's where Terminix was trading. Technically, they acquired Terminix at 19 times, LTM EBITDA.
But if you include the 150 million of cost synergies, which I think are underrepresented it's 13 times, EPS was probably above that. Like when the scarcity of assets out there means you are having to pay a nice premium for these larger businesses, how many of those would Rentokil have to do before they could just do what they did with Terminix in fell swoop.
Paul Giannamore: A hundred percent. I agree with you, Tim. It's one of those things where it is a lot of time, money, and effort to do an acquisition. And so I think when you look across the board, there's not a tremendous difference between doing a $5 million acquisition or $25 million acquisition or a hundred million dollar acquisition.
I think they got it at a good price. And I agree with you that I believe Rentokil is being a little bit conservative with the amount of synergies that they're going to be able to realize from that, because Tim, I think about this for a second. I guess this is a question for you. When you think about Rentokil’s network here in the United States, you go out and you buy Terminix. Could you not just get rid of the extreme majority of the corporate function?
Tim Mulrooney: Yes, you can. Really, what you're buying is the branch network and you certainly need a certain level of corporate infrastructure to support that, but you're going to be able to get a lot of savings from the corporate infrastructure that you're going to be able to cut. That's a big piece of it, I think.
And then you add in the fact that you're going to be able to shut down branches that are nearby each other and roll them up. That's not an inconsiderate amount of money. And then the real savings—and this is trickier from my perspective—is rerouting and getting the benefits of density because in those cases you may have branding issues.
And so that'll get a little trickier, but I think that's the challenge that Andy faces and it’s not rocket science, right? It can be done over time carefully. We saw Cintas do this with G&K in the uniform rental side of the business five years ago. And it was a slow and steady process. You got to very carefully rebrand and reroute, but if you do it slow and steady, close branches where it makes sense over time, you can extract immense value.
I mean, just for a picture when Cintas acquired G&K, they effectively raised their gross margins by 300 basis points from the rerouting and everything else. And then you get the benefits of the end from corporate infrastructure and it lowers your G and A as a percentage of sales. So your EBITDA margins go up by more than 300 basis points.
I mean, every dollar that's of revenue Cintas makes they have a 500 to 600 basis point advantage relative to all their competitors, just from the size and the density benefits and Rentokil knows that. And that's where I think the real value is.
Paul Giannamore: In your report, you specified that you believed Rentokil was conservative in their public assessment of synergies, based on our math. It almost appears that if they do nothing else, other than rationalize the kind of the corporate cost structure, as well as the regional kind of field level above branch level, if they do nothing else, they're going to meet or exceed the proposed synergies of this transaction.
Then over a multi-year period, what you just talked about with regard to getting the uptake in gross margin, due to the density play, that's almost all gravy in this deal.
Tim Mulrooney: It's all gravy. I a hundred percent agree with you. And then there's the thing that I haven't heard most others talk about, which is the natural synergies you're going to get. Just because Terminix is in the midst of a turnaround. For example, the mobile termite claims, I mean, Terminix is under earning on their margin, their EBITDA margins by 200 basis points.
Because the termite claims expense is so high in mobile, but they're turning a corner on that. I mean, turn my claims expense was a $5 million EBITDA tailwind for the first time in three years in the third quarter, they're turning the corner on that. So they're going to get a 200 basis point margin lift over the next three to five years, just from turning that situation around. Rentokil reaps all of that benefit, according to Rentokil, that's not even part of that 150 million in synergies that they're talking about.
So there are hidden synergies here. How much synergy do you think they'll get if Rentokil can raise Terminix’s retention rates to industry levels? Easier said than done, but I mean, that's part of the plan what's baked in there.
That's not part of their synergy target. So I agree with you. The 150 million I think is very conservative perhaps by a factor of two.
Paul Giannamore: Yeah. I agree with you.
Patrick Baldwin: That’s great. That's it. That's the episode. That's all we need. That's all I wanted to know. Then there's the three pages of notes we haven't gotten to yet. So let's do this. Financials in terms, right? If I look at the PCT 100, I almost think like that's narrow, scoped, right? I think Rentokil is a 1.1, 5 billion on there, but really this is a $4 billion entity buying a $2 billion entity at the end of the day.
Right? People can't hear you when you nod your head, Tim. Just part of audio.
Tim Mulrooney: Right.
Patrick Baldwin: Okay. Thank you. So, in the terms, just to help narrow down what is included, I really want to talk about what's excluded, right? So, there's some things here that are flagged. One is the potential carve-out and I don't know why, but Terminix UK you've got Peleus and then Nomor, Paul did the Nomor deal back in ‘19, that's a 45 to $50 million carve out.
Why can that not be part of the deal?
Tim Mulrooney: Paul, you want to take this one? I know, you know, this well.
Paul Giannamore: Patrick every time we do a transaction in this space, if you look at it, I'll use the United States as an example, you've got the federal trade commission and the department of justice. And so there is some legislation. We have the Clayton antitrust act. We have the Hart Scott Rodino legislation that allows government regulators, and this is a federal question, typically to review the competitive or anti-trust nature of a transaction. What is common for me in the pest control industry is whenever I think here in 2022, the HSR threshold is a $92 million transaction value. So anytime transaction value breaches, a certain size, we have to file with the FTC.
And typically we get what's called early termination. So we'll file a proposal with the federal trade commission. They'll look at it and sometimes they'll have some questions, but most times not. And they'll approve the transaction from an antitrust perspective. They're much more granular in Europe and the antitrust regulators are typically more difficult to deal with than us antitrust regulators.
So like for example, Norway is one of the most difficult to deal with. UK, of course, there’s CMA there. And so because Rentokil has some pretty substantial operations in Norway, As well as obviously in the United Kingdom, I think they're roughly 80% of the market there. They can't buy Terminix’s operations.
And interestingly enough, the majority of Terminix’s operations in the United Kingdom actually were divested by Rentokil or by Mighty a target that they were acquired two years ago. So we've come full circle. Now Rentokil was trying to buy Mighty. They couldn't buy the national accounts business.
They were forced to dispose of them. Anticimex looked at them, and Rollins and a variety of acquires. And then of course, Terminix bought that business. And at the time I think it was roughly around 19 or 20 million pounds in revenue, of course, Nomor owned a substantial presence in Norway under the Peleus brand. So now ultimately Patrick what'll happen is prior to the consummation of Terminix/Rentokil, Terminix will be forced to dispose of those businesses that would likely raise some antitrust issues in Europe. And there no uncertainty surrounding those potential dispositions, right? Those are known antitrust issues and the company realizes they have to be disposed of. Now in the United States, it's a slightly different question. And Tim and his team has done a tremendous amount of research, and it's a very opaque area, and there's not a lot of publicly available information on this topic.
There's also not a lot of, I mean, there's precedent, but there's a lot of uncertainty surrounding how regulators will deal with these precise issues that we're going to talk Tim about here momentarily. So, Tim.
Tim Mulrooney: Hey.
Paul Giannamore: I think the big issue not so much local area, competitive issues. You might have that, right.
You might see some branches in Arkansas. And Terminix and Rentokil like own, 90% of some acute local market, which is fungible as gold and can be very easily sold off. I think the real question and the real question that the merger ARB shops are out there trying to figure out is potentially a handful or two handfuls of these big national accounts going to STEMI this deal.
Tim Mulrooney: That's right. Let's break this down into a couple of things. So first of all, Peleus and Mighty, like you said, those are known entities. There's two different buckets here that I think investors are keyed in on, and that the regulators are going to be keyed in on. Are there certain regions where density will be too great or market share will be too great.
And then national accounts. And really on the density side, if I'm looking at my note here, we find a couple areas where there is a decent size step up in between pre-merger concentration and post-merger concentration. The biggest one being the lower Midwest, which is not as much a function of the fact that these guys have a ton of locations in the lower Midwest.
We count 17 for Rentokil in 28 for Terminix, 23 for Rollins. It's just the fact that there's not a whole lot of other major regional competitors in the area. And so that might be something that they look at. And then the other one is what we define as the mid-Atlantic. There's a decent size step up.
Now the good news is, as I alluded to earlier, the actual absolute number, the HHI number that we calculate for the mid-Atlantic is 1,350, basically, which is way below the 2,500 level of threshold that you would typically see as being concerning. So even though there's a decent step up, that's less of a concern.
Really the lower Midwest will probably be the key area from our perspective for regulators, but it's still below 2,500. So, if they do have to divest some branches, it's probably not going to be many. I don't think this is going to be the key concern. The key concern, like you said, Paul is probably national accounts.
People say to me, why is this a concern?
Patrick Baldwin: Why is this a concern? Was that my queue?
Tim Mulrooney: Yes, it was. Good question, Patrick, because national accounts is only a hundred million dollars of Terminix’s business. And if you get rid of some kind of revenue that they're not true national accounts, but maybe they need special services or reporting.
They're kind of considered national account in nature, but they're not true national accounts. It's probably closer to 80 million. We think that's true. National account revenue. That's way below the $245 million threshold. What's the problem? Get rid of the national accounts and close this deal. Well, it's not that simple.
The problem is that there are four major national account competitors in the space and getting rid of Terminix reduces that to three. So the problem isn't the amount of revenue that Terminix has. It's the issue that you're going from four to three. And this is a big issue because we've seen the DOJ or the FTC over the last five years reject deals because of the concentration of folks who can service national accounts. AON wanted to acquire Willis Towers Watson a couple of years ago, these are all different spaces, but it's the same premise. That deal got rejected because they were going from three to two. Staples wanting to acquire Office Depot.
That deal got rejected specifically citing there aren't others out there who can serve as national accounts. So if you're a national account customer, you are all of a sudden going to be taking price from one person or two people instead of three. There was another deal to Cisco wanting to acquire US Foods.
The language is a little bit different. It was like large B2B transactions, i.e., national accounts. But again, national accounts being listed here as the key issue. So the real issue, again, not the Terminix has all this national account revenue and what are they going to do with it? Remember half of that came from Copa San just a couple of years ago.
It's not like Terminix has this vast network of national accounts. It's that it'd be going from four to three. So how do you solve this problem?
Because Terminix can't just divest the national account revenue to the other two players. They can't divest it to Ecolab or Rollins because you end up with the same problem.
You're still going from four to three. You need to find someone that you can divest this to. That has a network that can service national accounts. That's willing to buy these accounts so that you can keep for competitors. Now, I'm not saying they're going to four to three is a deal breaker. Maybe the regulators will look at it differently, but I think that this is the thing that folks are concerned about.
I don't know if you agree.
Paul Giannamore: In my experience. And by the way, I am no way an expert in any way, shape or form on antitrust issues. But it's always, when you read through a lot of these antitrust decisions, there's always reference to acquires with substantially the same capabilities. It's not like. Could you go out and [00:31:00] just hand all this national accounts work to Cintas? Well, I mean, sure. They've got a pretty big network and they're in a lot of the same places that Terminix and Rentokil are, but do they have substantially similar capabilities in order to service that? Or would the customer be getting inferior quality? So I have talked to some antitrust experts in recent weeks, and it doesn't really matter to the DOJ for example, that this might only be 5% of their business versus 50.
It's really maintaining the competitive integrity of the marketplace. And so they're not going to crush 5% of the customers any more or less than they would crush 50%. And so that now I guess gives rise to the fact that these two parties need to propose some sort of a remedy to something that will likely come up here and review.
And so Tim, I'm gonna kick this back to you. What sort of remedies exist in your mind.
Tim Mulrooney: Well, we've spent a lot of time thinking about this and Paul, you and I have [00:32:00] chatted about this. What can Terminix do? They need to find someone to sell this to, and, you know, Cintas, isn't something that I considered very strongly before you brought it up, but maybe that's the solution, not Cintas specifically, but maybe, but more broadly. Is there another route-based business? I mean, we've seen other route-based businesses with pest control in the past that have divested it over the years. Is there another large route-based competitor who can bolt on pest control? That's tough because the national accounts are spread out. And are you going to get good density in any given area or is it going to be really low density in a bunch of areas, these national accounts that could be a tall order, but maybe that's the answer?
I don't think private equity is the answer because private equity doesn't have the infrastructure in place to support it. So then Terminix would have to offload branches, people, trucks, they'd [00:33:00] have to offload a lot more than just the customer accounts and maybe they can do that. Although I think that that would be difficult for the same reason.
These national accounts are spread out everywhere. So you'd be servicing a small amount of revenue and a lot of places probably. So, A, maybe Terminix can somehow figure out how to carve this out of their own infrastructure. That one, I think is the least likely. B, maybe they can find someone in an adjacent space like uniform rental or waste management, or what else is route-based cash…?
Paul Giannamore: ABM.
Tim Mulrooney: An ABM, exactly. Something like that, or maybe a BrightView like landscaping or lawn care or something, I don't know, TruGreen. Or C, can they find someone in the pest space that has enough of a footprint today and is growing rapidly enough that they see the value in these national accounts? And they'll take it today [00:34:00] with the idea that they'll build out in the locations that they don't have a presence.
And in the meantime, subcontract that business out to someone else in the area until they can themselves build it out. So I'm thinking specifically of Anticimex, who is not a national account player today, but does have a decent sized footprint. And does I think subcontract out some national account business, Paul, correct me if I'm wrong.
Paul Giannamore: Yeah, I think in North America, they've got about a hundred thousand USD and national accounts. So, it’s really tiny. And it's one of those things that I think that your thought process is correct, Tim, it's either, I guess, choice A is like this actually isn't a problem. Right. So there's much ado about nothing. The DOJ gets there, and they say, “Okay. Fine.We go from four to three. It's not that big of a deal. We're not going from two to one or three to two, or what have you. It's a non-issue. No one really knows right now.” That's number one.
Number two, you could do a Cintas or an ABM or one of these national route-based [00:35:00] outlied sort of businesses. But then Terminix has spent the last two years, basically pulling Copesan work from affiliates, acquiring Copesan and partners, and really turning Terminix commercial into something.
Of course, now in the new regime, it's been collapsed once again. So who the hell knows? But at the end of the day, they've tried to turn it into more of an integrated business. So I think it's a little bit more complicated to do that whole, send it out to, like a Cintas. On the private equity side. I mean, Tim, could you not go in there and say, “Well, McLeod had 6.5 million in national account business.Sure it had X number of million and Gregory...” And could you not go and buy those operating businesses whereby another acquirer and maybe an Arrow or a Massey or a financial sponsor could buy some of these key operating businesses that were former Copesan and shareholders that have acutely [00:36:00] high level of national accounts and then kind of build around and work their own sort of Copesan-affiliated partner, 2.0, right.
It's a clunky, hard-to-do-in-a-six-month-period sort of process, but it's in my mind, it almost makes more sense. I think from a regulatory perspective that the customer would at least receive substantially similar services. I'm interested in your thought on that, Tim.
Tim Mulrooney: Well, Paul, that's not something that I've considered, but I do think that might work. The downside is you're divesting more than your national accounts. You're divesting more than that 80 million because we know assured and McCloud and Gregory have a lot more revenue than just the national accounts and you would have to sell probably most of what those businesses were.
So you're selling more than your national accounts now does McCloud plus Gregory plus assured plus some Copesan and stuff. Does that exceed the $245 million [00:37:00] threshold? No. No. All those together, all four of those together. No, you'd be safe, but you would be divesting more than you probably were hoping to divest, but in that scenario you'd be selling the infrastructure so that you can fully support those national accounts and anywhere that you were not, you could potentially subcontract that out.
So, I don't know Paul, but that's an interesting solution to the issue.
Patrick Baldwin: How does it handle infrastructure? Like I think of Gregory and McLeod being Southeastern-ish assured up in the city. And where's the coverage?
Tim Mulrooney: Assuming that some of the coverage comes from their Arrow, or Massey, or Anticimex’s existing footprint. So, you already have an existing footprint in quite a few places. Then you add layer on this footprint on top. Now maybe you have 70% of the country covered and you can subcontract out [00:38:00] the other 30% where it makes sense realizing that these national accounts aren't going to be in a hundred percent of locations either.
So that might be enough to get you there. But again, this is all speculation. And I think the broader point being there doesn't seem to be a simple answer.
Patrick Baldwin: The existing pest players, cause it can't be Rollins, it can't be Ecolab, like you said. Okay. So, the other ones, right? Anticmex, I think they're the most spread. I think that's probably been my number one. Pick again, this is speculation. It's fun. Number two Certas. Although they are very widespread for now.
Truly Nolan. We have not mentioned, but looking at their map, they have decent coverage better than expected. One that wasn't mentioned why not Service Master, why can't serve as master by the national accounts. Am I totally crazy for that?
Paul Giannamore: A little bit.
Patrick Baldwin: I'm crazy. But I've been accused of worse.
Tim Mulrooney: Well…
Patrick Baldwin: Let's see what Tim's got on that.
Tim Mulrooney: I don't know, Patrick. I mean, then they're getting back [00:39:00] into the pest game and only very minimal.
Paul Giannamore: I mean, certainly Rentokil would probably do it, but then Rentokil to have to allow them to circumvent the non-compete that they have with Terminix global holdings. It's a complicated one. And I don't think that Service Master and any of those brands over there just don't have the capabilities in my mind.
Here’s the conundrum. Let's go with the assumption that a regulatory authority comes in and says we have a national accounts problem. Well, okay. So if we start going down the list and we say Anticimex, why would Anticimex take off off of Terminix a subscale business that is likely a loss maker when they could clearly step up today and say, “Hey, we'll pay the same amount that Rentokil is going to pay to buy all of Terminix, and we're not going to have to deal with any anti-trust issues at all. So shareholders, if you're going to sell this thing, sell it to us, don't sell it to Rentokil.” [00:40:00] So if that were going to happen, Jarl and company would have been on that. But Patrick, if you remember, when I think in one of the original episodes that we had Tim on, and we had Jamie Clement on, around there, we talked about the blond beast from Sweden.
We talked about Terminix being the Bermuda triangle of pest control for him at the end of the day, Anticimex’s model is kind of anti national accounts. So I don't see them playing. If this becomes a problem, I do think that there are some interesting opportunities for some players out there who can think on their feet very quickly for a Massey or an Arrow to basically say, okay, we can call some shots here because on the one hand, we've got regulatory agencies telling these guys a deal won't get done.
They clearly want to do the deal. We'd like to pick up some broad-based revenue in the United States, but we're only going to do in a way that makes financial sense for us. So sell us Gregory, sell us McLeod. That gives us that lower Midwest, because think about it. McLeod goes from [00:41:00] basically Chicago Metro all the way down into the upper Midwest, right.
They covered six and a half states with Copesan and Tim, to your point. Yeah. It's going to require Terminix to divest more than they would probably like to, but it's one of those things, sell us a couple operating businesses. If we're at Massey, if we're Arrow, we can do the whole Southeast. No problem. If I'm Arrow, I can go all the way out to Tucson and then I'll get out there and I'll create my own.
Let me call up some Copesan affiliates that have gotten the business pulled from them. If I look at up and down the east coast, you've got like Moyer, indoor, outdoor Joe's over streams business in the Philly, Metro area, all these smaller affiliates got their Copesan and business yanked from them over the last 12 to 18 months.
Take it back. My gut as of today is that I think there's going to be antitrust issues. I think that the federal government is going to have a problem with this, but I do think that there are some solutions to it. And it's probably not a national [00:42:00] business per se. It's probably thinking creatively either with a financial sponsor or one of the super regionals.
Tim Mulrooney: Yep. They're going to have to get creative in that. That does seem like the most likely outcome for me to, to solve this problem, Paul. Sell this to someone who can support most of it and let that company, who's going to get these probably for a decent price, figure out how to service the locations where they don't currently have an existing footprint that doesn't seem insurmountable.
You know, the stocks trading at a 13% discount to fair value acquisition price, right? So that usually on these types of transactions, there's noise at the beginning, ARBs shops step in, they do what they do, but the deal risk spread as we would call it is less than 5%. And that's the opportunity in between now and the closing.
There's a 5% spread between where Terminix stock is, where the target stock is and where ultimately what the asking price is. And that gets whittled away over time. And most [00:43:00] of the investor long-term investors slowly get out in the ARBs shop, step in and make their 5% with heavily leveraged money. So that it's a higher return.
That's how they do that. But 13%, what I say 13% or 14%, like it was 14% the beginning of the day. I think it's 13% now, but I mean, that's a widespread that is assuming a higher level of probability that the steel doesn't get done or higher level of uncertainty, I should say, than what we typically see for these types of things.
And I do think that probably most of it is to this issue that we've spent the last half hour talking about.
Paul Giannamore: How much of it do you think is related to potential shareholder vote issues on the side of the target?
Tim Mulrooney: Yeah. I do think that that's probably some of it too, though. Not as much as folks might be worried about. I mean, I've spoken to now many of the largest Rentokil shareholders over the last two weeks and early on when the deal was first announced back in mid-December, a lot of them came to me and just said, “What are we buying?”
They knew Rentokil [00:44:00] they're based in the US but they focus on international stocks and they've heard of Terminix, but they don't know a lot about it. They certainly don't know about the mobile termite claims and the history from the CD and R days through Nik and Brett. And there's a lot there to get them caught up on.
And they're just surprised that that all of a sudden the strategy seems to be changing, but as the conversation wears on, they do seem to warm up a little bit to this idea of, like you said, getting 360 branches at a cheaper price than you would if you went out and bought 360 branches separately in some of the potential upside from the fact that they're underestimating synergies, I think they're warming up to the deal.
My prediction is that Rentokil shareholders approve this deal. I think that they're warming up to it. It's just a guess, but I do think that that's going to happen.
Paul Giannamore: Here's the issue. When you look across the pest control industry, these transactions have gotten so expensive in 2021, right? I [00:45:00] mean, there's just so ridiculously expensive to do these private deals that
Tim Mulrooney: Thanks to you.
Paul Giannamore: Thanks to me. Well, that's why I like to think. I mean, we had one president of, one of the big four, basically say start finding non-Potomac deals because we're, so I take that as a badge of honor for me.
I like that. I want to turn that into an advertisement. I just can't get them to say it on the record. But again, these transactions, if you only look at this deal from a financial return perspective, of course, incorporating risk of execution. I think the execution risk is really quite low for Rentokil and you've got a scarcity of assets in the United States.
You've got organic growth becoming more and more expensive that the space gets crowded in structural pest control. Acquisition targets have gotten dramatically more expensive over the last 24 months and they were already expensive and organic growth has gotten more [00:46:00] expensive. And as people have seen these equity prices in this industry ramp up, we see more and more competition.
We've got more and more guys moving into this space. Not only starting companies like door-to-door companies and folks starting new companies. So you've got competition increasing as these increased prices of drawn people into the industry. And if I'm Rentokil, I look around the world and I say, well, there's a lot of runway internationally.
And we're the rest of the world guys. Like we've got a lot of opportunity in the United States. If I can buy this business at a relative good price, I'm going to buy Terminix. And then I'm not going to focus on north American add-ons cause I don't need to, because quite frankly, just rationalizing the Terminix business over the next, let's call it three to four years, maybe five years, we're going to get a return from that.
And now I can go out into the rest of the world and I can buy assets at a substantial discount to where I would be purchasing them in certain parts of Europe and the [00:47:00] United States. I mean, I think it's good on Rentokil. I think it's going to be a great move for them. Patrick, let me riddle you this, when you think about auction theory, what is the ideal amount of bidders at a table in order for me, the seller of an asset, to maximize my price?
Patrick Baldwin: The more the merrier, if there can seriously handle the acquisition.
Paul Giannamore: Let’s unpack it for a second. Would you argue that two bidder is better than one?
Patrick Baldwin: Yes.
Paul Giannamore: You argue that three bidders is better than two?
Patrick Baldwin: Yes.
Paul Giannamore: You argue that 201 bitters is better than 200?
Patrick Baldwin: Barely.
Paul Giannamore: Do you see a circumstance where 201 bitters would actually be worse than 200?
Patrick Baldwin: Gosh. I can only reference Black Bear because I knew there was a point that talking with you in the Mex about it like that, it was, Hey, it doesn't make sense to add these few players, but let's really be serious about this handful of players. And here's why [00:48:00] nobody needs to know about your business and get it all entwined and slow down the process.
Let's really just get serious about these.
Paul Giannamore: Yeah, I mean, that's right. So from an auction theory perspective, there is an ideal number of bidders based upon. The cost of both being the seller of the asset, as well as the buyer of the asset. And so it changes when you have an industry though, as small as pest control. I think the broadest auction I've ever done in pest control had 25 buyers.
And that was a mix of strategics and financial sponsors and we start broad. And then of course, we narrow that down very quickly. What really though becomes the issue in my mind is Patrick, not so much the number of bidders and a process, as much as the psychological aspect of every single acquirer is looking around.
It's very opaque. If you're running a process, right. They don't know who's at the table and they don't know what the other bidders are doing, but they're always trying [00:49:00] to make the decision. Like I'm not paying $1 more than the next likely buyer. So let me size up what the next likely buyer is likely to be doing.
And certainly, this complicates our life. Now we have actual— I wrote a commentary once on, and I think I actually gave numbers and I haven't looked back at this Patrick, but we did an economic analysis of what happened when we lost Terminix to the table. Do you remember this commentary where we actually—
Patrick Baldwin: Would been in ‘19.
Paul Giannamore: It was in 2019.
So we went back, and we actually tried to calculate and impute what not having Terminix at the table did to financial returns to the seller in an auction process. And so on the margin that decreased purchase price. And what I mean by on the margin is that Rollins is not looking to acquire necessarily the same target as Rentokil as Certas as Anticimex.
They all have different requirements, right? So I don't know, [00:50:00] I'll make this up. Rentokil has a substantial presence in Louisiana and they have a substantial presence now in Florida, they might not have the same interest in making an acquisition in Florida of a company doing 90% general residential pest as would Anticimex, for example.
So there are, when we talk about losing Terminix on the margin, the transactions whereby Terminix would have been able to create the most value and therefore bid higher than anyone else. We lose that, but we don't lose kind of the core of the market. I do think that this will change the market. I don't think that necessarily sets the standard one way or another.
I, for example, I'm more concerned about losing marginal buyers and I bring that up because you and I, Patrick have talked a lot about that over the last couple of weeks.
Patrick Baldwin: I just want to know for the record of the number was 10. Was that the answer? Cause I lost you.
Paul Giannamore: Well, you know, again, like it's a variable number, but I would say that when you think [00:51:00] about auction theory, a lot of times 20 buyers is not necessarily better than 10. In the pest control industry, six or seven. Buyers in a real auction is optimal because you get above that then you get diminishing return and at some point it actually becomes a cost in having those buyers in.
Tim Mulrooney: That's right. And so if this deal goes through in Terminix goes away, you're pulling one out, but Paul and Patrick, let me throw some names at you and you tell me whether or not these guys were around two years ago. Riata Capital.
Paul Giannamore: No, sir.
Tim Mulrooney: Riverside company, Haley Capital, PCM Growth, Dubin Clark. KKR with Neighborly, I guess they were that's one. Access Holdings, Thompson Street Capital Partners.
I mean, there is a large and growing lists, so you lose one, but there's a lot more in there today than there was two years ago.
Patrick Baldwin: Tim just told us who he met with at Pest World. That was hit list, it looks like.
Paul Giannamore: And the [00:52:00] majority of those companies are involved in just about every single process that we run. And, you know, you starting with Thompson Street made its entry acquisition, and Patrick, you and I discussed this. They made their entry acquisition in September with the acquisition of Presto, that's exactly right.
And they're a real deal. They're a billion plus dollar fund and they're not messing around. You're right. This will support the market. The reality comes down to the fact that if this deal is actually consummated, I can guarantee you if I'm sitting in Stockholm, if I'm sitting in Atlanta, I'm going to say, “Hey, Paul, over there loss two buyers, what are you gonna do big guy? You can’t push me around.”
And I heard the same thing though in Q4 2020, when all of these guys were like, you know what prices are going down in 2020? And I said, “Listen, look at all the fiscal spend and all the monetary bazookas. Prices are going up, boys.” And that's exactly what happened.
Patrick Baldwin: With one less buyer at the table. What is the M&A [00:53:00] outlook for the next six months until if this is a mid 2022 deal, what does it look like from now, until then? And what does it look like for the 18 months following the trends?
Paul Giannamore: Well, I want to actually kick this over to Tim here because competitors at the bidding table are only one part of the equation. In my mind, the biggest part of the equation is the macro markets. And we are now moving into 2022 or we're in 2022. We're at the beginning of 2022, we've got a federal reserve at quote-unquote “peacockishness.”
We've got effectively fiscal policy. That's going to really wind down here in 2022. So, the dual bazooka of fiscal monetary policy may start to change dramatically in the coming months. And Tim from an equity research perspective. You get concerned about this stuff to a certain degree, but correct me if I'm wrong in your line of business, it's really not so much things in [00:54:00] absolute terms, as much as it's making calls and companies that you follow vis-a-vis broader indices.
So, for example, if the S and P 500 goes down 10% in 2022, and you said XYZ company will market outperformed by, and they beat the index by 5%. So they only go down 5%, like, hey, you made the right call, right?
Tim Mulrooney: Oh, that's a win. Yup. Our ratings are outperform market perform and underperform. And we're one of the few investment banks out there with sell side operations that don't have price targets because we think it's so silly when you downgrade a stock and raise the price target at the same time, or, or you upgrade a stock and lower your price target, which often happens because you have to make the math work.
Just it's just looks so silly. Our stock ratings are based on a 12 month outlook. And we just say over the next 12 months, do you think that these will outperform market perform or [00:55:00] underperformed the S and P 500 or whatever index you think is more relevant to your space minds? The S and P because most of my companies cover small, medium-sized business America.
So, I mean, it's a broad swath of end markets, the S and P probably makes the most sense, but if you're a consumer retail analyst, you'll probably use like the S and P retail index. But in my case, it's just the S and P 500. Yeah, that's exactly right. We're just trying to make the call on how are these going to perform relative to the market?If, you know, if you could tell me that the market's going to be down 10% this year, that I'm going to tell you to buy Ecolab and Rollins, because Ecolab and Rollins outperform during periods of great uncertainty. If you tell me that there's going to be like, okay, interest rates, aren't going up as much as we thought, and supply chain issues are going to be resolved, and we're going to have a really heavy cyclical year this year.
Then I might pivot to some of my other names that are less defensive in nature and more risk on type of names, because we know that those are the ones that outperform the market and those types of [00:56:00] scenarios. So, you have to have a view on the market, and then yeah, you select from there, what you think is going to outperform underperform.
The real tricky part though, Paul, is that my client know all of that already. So if that's the only value I'm bringing to the table, then I'm out of a job. Really what my job is, is to partner with my clients, the big investors, and to give them the incremental piece of information that they didn't have. How big is national account commercial pest control?
What are the market shares? What's this density analysis, give them the little pieces of information that are outside of the macro point of view, because otherwise they know when to play the staffing stocks. They know when Rollins outperforms, FIT’s just going to be following that. So that's a piece of the equation.
Then we try to layer in our individual equity analysis to say, well, did you know that Terminix’s mobile termite claims issue is being resolved and they're probably on the [00:57:00] other side of it. And then that's going to add $20 million to EBITDA over the next 12 months, because that could make all the difference in the world.
That's kind of where we try to come in, but I feel like I'm derailing us a little bit from your broader point?
Paul Giannamore: No, I appreciate that point because I guess what you're saying is I'm an institutional investor. I've decided to rotate from growth to value. And I look at Tim's coverage universe and he's got these value stocks. And so now I've already made the decision. I'm going to, you know, values is where I'm going to be.
Now let me figure out where guys like Tim might have a different perspective on me understanding each individual stock vis-a-vis a broader index.
Tim Mulrooney: that's right. And there's just no way on the buy-side when you're covering 200 names that you're going to know what ABM’s cost structure is and their labor availability situation heading into next year and what the price differential between their deep cleaning disinfection COVID-19 hygiene cleaning services are versus their basic cleaning [00:58:00] services.
That's a difference between a 10% margin and a 30% margin. But why would you know that if you didn't cover it, the stock intricately, right? That's why you come to us for the nitty-gritty when exactly, like you said, Paul, when you've already figured out where you kind of want it, what direction you want to head. And we find a lot of folks oftentimes wanting to head in the pest direction.
I mean, that's been one of the happiest surprises of my equity research career is picking up these pest names and having no other sell side folks cover them or very, very few and finding so much demand for these names, from investors who love these business models
Paul Giannamore: I’m glad you got into covering pest control. There's at least one other equity research analysts out there that you've made his job easier. Cause now he can just copy you almost verbatim.
Tim Mulrooney: That does happen. Yeah.
Paul Giannamore: I appreciate that, Tim, because now I'm reading the same thing twice published by you first him another time.
Patrick Baldwin: I didn't get my answer.
Paul Giannamore: We apologize, Patrick.
Patrick Baldwin: I [00:59:00] love chasing them. That opens up to more questions, Tim, based on what you said and how you rate at William Blair, market reform is now how you've downgraded Terminix. Can you go back and explain it? It says based on this from your report, based on the current upside potential 14%, as far as the deal risks spread, we're downgrading Terminix shares to market reform.
Can you dig into that for me?
Tim Mulrooney: Absolutely. Patrick. So, we talked earlier about how Terminix is trading at a 14% discount to the fair value acquisition price. So if the deal were to close today at Rentokil’s current share price, there'd be 14% upside
Rentokil would pay 14% more for Terminix shares and what they're currently trading at.
So that our note says, we think this deal will ultimately get done. We don't see major regional issues. And we think the national accounts issue can be solved. And it doesn't exceed the $245 million threshold. So, we think this deal will get done. And when it does, your [01:00:00] upside is 14%. That is the range-bound. If the deal doesn't get done, then there's perhaps some downside to Terminix’s shares because Terminix is now trading in the mid-forties, right.
Or near there. And they were in the thirties before the deal was announced. So, does it revert right back to there? I don't know. The risk-reward profile of Terminix is now not look, there's 50% upside in this business over the next three years, you should own this for the long-term. The risk-reward is there's probably 10 to 15% upside and 10 to 15% downside.
That's a very balanced profile. That's why the downgrade happened. The implication being that the real upside in Terminix is now embedded in Rentokil’s stock. Which is why I believe a lot of the shareholders of Terminix are going to end up [01:01:00] holding, not taking the cash, taking the Rentokil shares and holding Rentokil moving forward.
I think that they still want to participate in that upside. You get a great company like Rentokil and you get the benefit of still participating in that upside at Terminix that you know is there.
Patrick Baldwin: Well, thanks for explaining that. Now, back to M&A, because both of you dodged this question. What does the M&A outlook over the next several years?
Tim Mulrooney: Well, um, I'll give my 2 cents. Obviously, Paul is way more intricately involved in this, but are you losing to, I don't know. I mean, Terminix will still be inquisitive under Rentokil’s umbrella. There's still going to add to their brands and Rentokil is slightly levered up, but they're going to be right back into the leveraged position that they are today a couple of year from now.
This doesn't knock them out for five years. But for the next several years, you're going to have a distracted Terminix with integration. So that is going to slow down deal activity. I think, and Rentokil will be somewhat distracted too, through all this integration. And [01:02:00] they basically just push forward several years, their M&A spend with this Terminix transaction.
I don't think it takes them completely out of the market. If something really attractive and strategic will come along. They're not going to walk away from that, but there'll be more selective until they get their balance sheet back to where they were. So, yeah, temporarily one to two years, it might change things.
Long-term I don't think this changes much.
Paul Giannamore: I think, I agree with Tim that it's really the uncertainty surrounding “How did the participants react?” Because a lot of this stuff is psychological really. And so how are the various market participants going to act? What sort of assumptions will they make? But at the end of the day, Rentokil we'll always continue to acquire businesses.
I think it makes a lot of sense for them to shift maybe a little bit of the aggression to foreign markets, because I think there's a lot of opportunity to buy on the relative cheap compared to the United States. And I think to Tim's point like [01:03:00] two, three, I don't know how many years they will make their money on a risk adjusted return basis, focusing on integration, as opposed to going out and buy something else.
That's how they're gonna make their money. So, they're going to be, I mean, from a capital allocation perspective, that's where they should be allocating resources. But I do think Tim's thought process that private equity will continue. There's plenty of acquires in this market to continue to support it.
Again, I'm not as concerned about market participants. We've lost Terminix for periods of 16 to 17 months, and that certainly hasn't done anything really. And realistically, it really hasn't done much. All the 2020 they were gone and for huge portions of the end of ‘16 into ‘17.
It’s not just pest control guys, and I know Tim knows this better than anyone. It is global M&A right by the time he ended up October of 2021 came around, we had exceeded deal value in any other year prior. So it's really what's going on from a monetary and fiscal perspective. That's [01:04:00] driving this consolidation. And I think that the fed will attempt to taper.
I think they will attempt to normalize rates. I don't think there's any way that they'll be successful in doing this. And it's probably going to be another risk on year.
Patrick Baldwin: Hm.
Paul Giannamore: I think there's a lot of uncertainty in the markets today, but at the end of the day, I, there was no way for them to unwind this balance sheet.
And so that'll prop up prices.
Tim Mulrooney: We saw what happened during the taper-tantrum a couple of years ago. Right. They weren't even arguing about raising interest rates. They were just saying, “Hey, you remember that giant helicopter of cash that we're dropping every month. We're just going to drop a little bit less.” And the markets lost it.
They lost it. I could only imagine what it would be when you start to unwind this stuff, but we'll have to see how that goes.
Patrick Baldwin: Speaking of unwinding, the word “franchise” has been brought up a few times and I know Terminix franchises could be part of the M&A [01:05:00] conversation. This is now part of Rentokil’s M&A pipeline.
Franchisees are part of the discussion. Is this something that needs to get current? How does that even function if Rentokil buys Terminix, and then you still have these Terminix franchisees, what around 30 or so in the U S maybe a little bit less, how do they operate after Rentokil-Terminix deal gets done?
Or can it be part of the deal?
Tim Mulrooney: I'm so glad you asked this question because I can't wait to get Paul's perspective because I am so confused. There are three large franchisees in Carolina that are going to operate under the Terminix name and Rentokil will now also be operating under the Terminix name. How do you solve this? And if they divest Gregory, I guess you're killing two birds with one stone, because you're getting rid of your national accounts and your franchisee issue.
So maybe that's one way to alleviate the situation, but still at the end of the day, [01:06:00] you've got Rentokil that owns Terminix and you have a competitor who's also operating under your name. That's an interesting dynamic that Terminix doesn't currently deal with.
Paul Giannamore: Yeah. You know, in the early nineties, there was a federal lawsuit whereby there was a franchise group that filed suit against Service Master at the time and basically said, well, “Look you, Service Master, are competing against us, the franchisees through your operating business Terminix.” And if you read the court's holding, they said, “Hey, thanks for stopping in today.
But this is not really Terminix. This is a big amalgamation. It's a big conglomerate and they're not really violating the franchise agreements.” You've got Fayetteville, Columbia and Greensboro, the main three franchisees in the Carolinas that collectively do $250 million or so in customer revenue. You've got a substantial one down in Louisiana, and then there's another [01:07:00] 25 or so around the country.
In certain markets, it becomes very, very complicated because the current lawsuit that's going on right now is one by which now that Service Master has disappeared, right? They've gotten rid of the brand's business. Terminix has now Service Master converted into Terminix, blah, blah, blah, blah, blah. This lawsuit says, “Hey, Terminix is competing with me.”
And so that suit has been ongoing for about 14 months now, as you know, Patrick, I was subpoenaed in that case. But I think about if I am the Terminix franchisees, I think this is the best opportunity that any of these guys could possible you handed. And here's why. There's not only a financial, but there's also kind of a psychological incentive for Terminix to acquire these franchisees as soon as possible, due to the thresholds that are established in the agreement, they're not gonna be able to go out and buy all of them.
But I don't think that the Rentokil shareholders want to see [01:08:00] Rentokil in some sort of a conundrum. So I think that these shareholders right now, these franchisees are owners of assets that are probably trading at all-time highs, given the financial markets right now and given this perfect storm of this Rentokil-Terminix acquisition, the ones that are particularly in like Louisiana and the Carolinas.
If you think about it, like we sold a business called McNeely to Rentokil last year and yeah, that's $13, $14 million of revenue, literally right on top of the Terminix triad business, like right on it. And it's actually specifically referenced in the lawsuit. When you look at Rentokil’s business in Louisiana—boop! It's right on top of that big franchise down there.
So, there is a tremendous amount of overlap. This will become a complication. And I mean, look guys, if I'm a franchisee, I could play Mr. Tough Guy, but sometimes it's best to take the money. And I've never seen a better opportunity in my life for franchisees [01:09:00] to cash in on this. So, I think we'll see some of them do it.
Tim Mulrooney: I don't know the situation like Paul does. I don't have a relationship. I do talk to a couple of the franchisees primarily because Paul's introduced me to them over the years. Nice guys. We stay away from the legal stuff and I probably should for the purposes of this podcast,
Paul Giannamore: These franchises have kind of existed out there for years. It's not really germane to analyzing Terminix or Rentokil, I guess from Tim's perspective. But yeah, Patrick, I think it's a good time to be a franchisee right now.
Patrick Baldwin: Cool. It brought clarity to it. Cause I had no clue. I don't know. I don't want to say I was thinking the same thing as Tim, because I don't want to accuse him of that low thinking there. I've got one more, at least.
Paul Giannamore: Did you just say accused him of a low thinking?
Tim Mulrooney: That’s what I heard. That's what I heard, Paul.
Paul Giannamore: We wouldn't even know what, I don't even know what that means.
Tim Mulrooney: Yeah. And in effect you did accuse me of that by saying that, by the way.
Patrick Baldwin: I know I did. I'd dumbed down my grammar for this thing. It's not [01:10:00] even English anymore. I don't know what I speak. Paul, when Bobby and I first got introduced to you back in like 2010, 2011 said, “Hey, what's this business worth?” And went through the valuation or appraisal process. You said you don't necessarily have to ultimately sell this business.
You looked at the alternate exit strategies or things you could do, right? It may be, it's a shareholder buyout. Maybe it's a succession plan. Maybe one day it is to a strategic. If you stand back and look at Terminix, maybe your Terminix investor scratching your head, or maybe you got the voter card in front of you as a shareholder.
Why Rentokil, why did they really explore the alternative exits? Why not another private equity? Why didn't have a shot at this or why didn't ABM or it Cintas they got mentioned today. Was there a real full price discovery on this deal or was just like, hey, the chairman and the board at Rentokil and the board at Terminix had a coffee one day and said, “Hey, let’s do it.” [01:11:00]
Paul Giannamore: It's really only up to the board and the shareholders of Terminix to pine, whether or not they feel that they've got appropriate price discovery. I think if I look through the process I say to myself, well, Anticimex was probably not likely a buyer. I mean, there had been a lot of public and private discussion about Anticimex and GIC and EQT joining up to buy Terminix.
I don't think that was necessarily in the cards. I imagine this sort of discussion happened in the boardroom Rollins has got bigger antitrust issues and Rentokil, you've got Ecolab, which is entirely different business from like residential termite versus commercial pest control as an afterthought. So that's not even a real buyer.
And then of course the only logical acquirers, realistically, I think would likely have been financial sponsors and not a ton of them, but there are some financial sponsors that could have done this. And then I think if you're a board member, you have to say to yourself, okay, [01:12:00] do I structure this in a way whereby my current shareholder base. the opportunity to share in the upside of value created. And I would say that value creation with Rentokil versus financial sponsors, a no brainer, irrespective of what upfront purchase price consideration would have been. Right. I mean, clearly if I'm a big private equity firm, could I lever the hell out of that business and acquire it?
Sure. I have the financial wherewithal to do it, but now it's kind of CD and R part two. And I'm just kind of doing some financial engineering and maybe some acquisitions and what are really my levers to create value. In my mind, the board walked through it and said, Rentokil has the track record.
Rentokil has the financial wherewithal and Rentokil allows me to allow my shareholders to get upside. Therefore they're going to vote for it. The whole price discovery thing. Yeah. I mean, there's always [01:13:00] ambulance chasing shareholder type attorneys running around. I've already seen all the Bloomberg alerts about all the different ambulance tasting shareholder lawsuit, attorneys that are looking into to make sure the board didn't breach fiduciary duty and dah, dah, dah.
It, which they never turned into anything. Anyway, they're just a total dead weight loss in society. Nine times out of 10.
Tim Mulrooney: I think they write the press release before they even do the analysis.
Paul Giannamore: A hundred percent.
Tim Mulrooney: On the issue of price discovery, there's a couple of different ways you can go about it. You can formally decide what the board that you're going to put your business up for sale. And you can go through a formal process. I wasn't there in the boardroom, but my suspicion is that that didn't happen.
I don't think that Terminix was looking to sell. I think that Terminix was surprised as I was that they in mid-November were trading at 13 times EBITDA, which is low for them because a year before that they were trading. 20 times, [01:14:00] or I guess two years before that, before the termite claims issues came about when organic growth was improving, retention rates were improving.
Margins were moving in the right direction. It was a 20 times business. And then when we see other large pest control companies selling for 20 times or Rentokil typically trades 17 to 18 times, Rollins is an outlier at 30 times. And Ecolab's 22, 23 times. But I mean, 20 times is not unheard of. So it'd be sitting in mid-November at 13 times, I think that they were taken by surprise by that I thought it was oversold for sure at that level. And if I'm Rentokil that's when I step in and say, this is our chance, you know, this is my chance. I don't know that I want this headache, but it's too attractive to pass up. Let's have the conversation and they go in and they walk out of there striking a deal.
I think that that's how this probably went. It is incumbent upon Terminix’s board to [01:15:00] extract the most value that you are a fiduciary safeguard for your investors. And when Rentokil comes out with a $55 stock price with their offer, they're saying we're offering you 50% upside to your current stock price.
You go tell your shareholders that you said no to that. Go ahead. See what happens. At that point. It was too attractive. Now the interesting thing was, is that Rentokil, I think, was able to tie the deal price to their share price. So there's a couple different ways you can do it. You can tie the purchase price to a fixed number $7.5 billion.
Let's say we're paying that out no matter what, if our stock price goes down, we will just issue more shares. But at the end of the day, you're getting $55 per share. We will issue more shares. If we have to, we will make you whole at that price. The other way to do it [01:16:00] is to tie your stock price to theirs and say, we will pay you like today, we're offering $7.5 billion at $55 per share.
But if our stock price goes down, our purchase price of you goes down. You go down commensurate with us, which is why we talk about the discount to fair value acquisition price. Fair value acquisition price, today is not for the $55 offer that Rentokil made fair value acquisition price. Today, according to the ADSL exchange ratio is $50.02 and Terminix is trading at $43.36 .
So there's a $6.60 cent or so spread 13%. That's what the spread is.
Patrick Baldwin: Hmm.
Tim Mulrooney: But those are the two ways that you could do it. And they went with the second way. So Terminix is getting a little bit less than what they were getting on December 14th because Rentokil's share price went down on the announcement. But still even at that level, $50 versus $35, that's really hard for the [01:17:00] Terminix board to pass up.
And so I think Rentokil entered this opportunistically, watched Terminix’s share price in August, watched it in September, started to break apart in October, November and said, geez, at 13 times guys like, well, we got to go have the conversation, but I don't think that this was Terminix in June sitting around saying, all right, let's sell this company.
Let's reach out to all the people, you know, the drill let's go. I don't think that happened.
Paul Giannamore: This was clearly not an auction situation, you know, Rollins and Anticimex were blindsided. I don't think this baked for more than six to eight weeks prior to everyone else find it may be 90 days.
Tim Mulrooney: Yeah.
Paul Giannamore: I think you're a hundred percent, right. I think they watched it go down and said, this is an opportunity we can't pass up.
And quite frankly, the way they structured this deal and the purchase price that they struck, it's at a number, or it's really hard for, from an institution. Do I, [01:18:00] what's my upside to make a big deal about it. And am I really going to say no to it? It's just kind of like that perfect price. I thought it was a very well done by Rentokil and structuring that
Tim Mulrooney: Agreed. A hundred percent agreed.
Patrick Baldwin: Are you both bullish on this deal? Like, do you think the deal is going to go through with everything we've talked through from antitrust, the franchises that are out there and to what the deal was offered at? And does this look like it's going to be a deal to gets done?
Paul Giannamore: Look in absolute terms. It is a very high, multiple, I mean, if you get rid of the actual dot com boom, if you take me back to 1999, like doing industrial deals, like John Deere and New Holland and all this stuff, and these are like 6, 7, 8 times EBITDA deals, and those were expensive back in those days, you know, to see a pest control company, not counting synergies at a nominal like 19 times EBITA, like you've gotta be kidding me, but from a relative value, I think it's an outstanding move.
Tim Mulrooney: Paul, what did they [01:19:00] pay for their last three large deals? They probably paid close to 19 times EBITDA.
Paul Giannamore: You know, a lot of these big deals are always in the high teens, anywhere between 15 and 20, there are somewhere in that zone. Yeah.
And you know, like, as The Mexican likes to say, “They're buying companies where the owner doesn't know how to use the computer, they don't have all this sort of stuff.” Yeah. At least they know how to use a computer in Memphis.
Tim, I haven't had an opportunity to thoroughly study your most recent report as I have it sitting here on my desk and we're recording this a few hours after it came out, but you guys did some fantastic work on this. I know it was a ton of work to go through and look at the density. I mean, it's almost impossible really to get this sort of information.
So, you guys have done a great job digging up, and I know it's not perfect because it's impossible. Quite frankly. I think if you call these acquirers, actually let me rephrase that. I know that because I actually made some calls to these acquires and a lot of these guys don't even know, so it's hard to get [01:20:00] stuff, but I think you guys did a great job with us, and I think you've taken a great approach to the anti-trust issue, which likely to be problems, not necessarily a hundred percent sure that there will be, but can't say that there won't be, because I think really, that's what the investing public really needs to keep in mind is that this is far from certain and there's definitely some obstacles here, but I do think there are some potential creative solutions around this.
And so I think if I'm reading your report correctly, your gut tells you that this will likely be a transaction that's consummated at some point towards the middle of this year.
Tim Mulrooney: That's a good summary. Some of these are easier. I would not put this in the easy category that gets pushed right through. I think that there will be a regulatory review and I think the review will be primarily focused on national accounts. Not regional market share. And I think that there are, as we discussed at length, several solutions, these national accounts in such a way that this deal can get done.
And we're actually next week, we've got Andy Ransom and Brett Ponton in a fireside chat with me, [01:21:00] us three in a room together next week to talk about some of these issues. So I'm looking forward to hearing what they have to say too. And reporting back to you on what they said.
Patrick Baldwin: Is that just the three of you in a room or is that something we can watch like a fly on the wall?
Tim Mulrooney: three of us in a quote unquote virtual chat room for our clients to listen to us talk and just ask them a bunch of questions. We were very fortunate to, they're only doing two of them and we were able to get one. So, and we don't even cover Rentokil. So I consider myself very fortunate to have gotten one of those two slots.
Paul Giannamore: Well, that was going to be my next question. So are you going to cover Rentokil.
Tim Mulrooney: The answer is, I don't know, man, that's my really honest answer. That's not me trying to circumvent the question. We don't typically cover shares that are international based. We tend to be US equity research analysts. However, we've done so much work on the pest control industry and we've spent so much time there and now potentially losing one.
So maybe it does make sense, given that obviously US [01:22:00] pests is a key focus area for Rentokil, and they will have an ADS shares that trade on us exchange. That's tied to their shares in London. That may be, there is a way for us to do it. That is to be determined. But I think my fireside chat with Andy next week is going to be one of the key things to see if we can build a rapport.
And if so, then maybe that does make sense.
Paul Giannamore: Well, that'll be interesting. I hope you end up covering Rentokil, Tim. I'd like to read your research on the topic.
Patrick Baldwin: Tim really appreciate the time. I know you've been working nonstop on this just to get us here, get that report kicked out this morning was fantastic. I don't know if it's too late for our listeners to pick up a copy of the report. No one covers this industry like you do. So, Tim, for more information, how do they get on your list.
Tim Mulrooney: Oh, thank you for saying that, Patrick, that's incredibly nice of you. This podcast last July with you guys. It was one of the best [01:23:00] things that I could've done for my research, because I mentioned at the end of the podcast, “Hey, reach out to me at tmulrooney@williamblair.com and I'll get you a copy of what was then an update report on the whole industry, where we kind of went through the residential, the commercial and the termite industries and detail and all that kind of stuff.
And so many folks reached out so many pet owners and operators reached out and I was able to get to know so much of the industry, just because so many folks listen to your podcast, that it really changed things for me. Like an issue would come up with rodenticide in California. And all of a sudden I had seven people in California that I could call and say, “Hey, what's the real story on this issue?”
And that is true for all over the country. We've really benefited from this. So selfishly, I'd like to do that again and say, if you are a pest owner or an operator and you want to see our antitrust, our 2025 page antitrust analysis, please reach out to me at tmulrooney@williamblair.com. We'll be more than happy to share that report with you in exchange for just learning a little bit more about your business, and always trying to get [01:24:00] to know more folks in the industry.
This is one of my favorite industries to cover by far. I love getting to know all the people in the space. It's such great people going to Pest World inV egas was so much fun for me because I've gotten to know so many more people and it's just a great group of folks. Please reach out if you want a copy of the report.
Paul Giannamore: You know, Tim, let me ask you one last question on the topic of your research. I've worked with equity research guys all the way since my bulge bracket, investment banking days 20 years ago. A lot of the folks that cover this industry on Bloomberg and on facts that we get all the entitlements, right? So we get JP Morgan, Morgan Stanley, all the different equity research analysts and all the reports, the cover pest and other industries.
And a lot of these guys are always like, “Hey Paul, this is for you and your team only. It's not for any pest control guys. Like it shouldn't get out to your average pest control Joe on the street.”
And most of them are like that, but you've always been the exact opposite. And I was wondering is your compliance department [01:25:00] just, are they super awesome guys out there?
Why is that?
Tim Mulrooney: I mean, I think it's probably two things. Number one, William Blair is a pretty cool place. My research director gives me a lot of flexibility and how I do my ratings. When I decided to go down to the morning meeting, what I say. It's a very entrepreneurial spirit and we're a partnership we're not publicly traded.
We don't have shareholders to answer to. I answered to my partners and that does create a different dynamic about the flexibility that I have. But I think number two is not to say anything about any other research analyst, but I know for sure that I have something actually many, many, many things to learn from every single person in this industry that I talk to.
I don't pretend for a second that I think I know more than someone who's been doing this for five to 10 years. I know that there's so much that I have to learn because every single time I talk to someone in the industry, I learned so much. And that's the name of the game for me when it comes down to brass tacks, [01:26:00] the way I get paid is I know more about this industry than my client.
And the best way to do that is to talk to folks who are actually on the ground doing it. So it's actually selfish in that regard. Every conversation that I have with someone in the space become a little bit better in my job.
Paul Giannamore: Well keep up the good work out there, Tim. Cause there's a lot of, a lot of careers relying upon copying your work. So, keep it going.
Tim Mulrooney: Will do.
Paul Giannamore: And I look forward to seeing you down here in PR I don't know when you're going to finally get the wife out of cold ass Chicago in the middle of the winter to head down here, but looking forward to it.
Tim Mulrooney: There’s an ice storm right now, actually. It might be the time to bring it up. Paul, I think we may be down there sooner rather than later.
Paul Giannamore: Right on.
Patrick Baldwin: Thanks again, Tim really appreciate you making time for us.
Tim Mulrooney: Thanks for having me back on The Buzz, guys. This is always so much fun for me. Love listening to the podcast. I'm almost all caught up on the previous episodes. You guys do a great job, Patrick and Paul. Thanks for having me on.
Paul Giannamore: Absolutely. We'll see you soon, Tim, take care. [01:27:00]
Patrick Baldwin: This episode has been edited, mixed, and co-produced by Dylan Seals of Verbal.
Dylan Seals: Hey everybody, Dylan here. I want to remind you right now to go ahead and subscribe to The Boardroom Buzz. We've got some incredible episodes coming up that you're not going to want to miss. Also, if you've enjoyed the podcast, please go to the Apple podcast app and leave us a short review. We'd love to hear from you.
Thanks so much again for listening, and we'll see you next week.[01:28:00]