I am on my way back from two and a half weeks on the road in Europe and the Middle East, trying to get transactions done in an increasingly difficult environment. In addition to our podcasts, The Boardroom Buzz and Off the Record, and events, Bubble Trouble, I thought it would make sense for me to begin putting out brief, weekly market updates.
In the weekly update, I am going to focus on what is going on in the (1) public and private markets, (2) macroeconomic environment as well as (3) current transaction-related news in the pest control industry. Further, since I receive a ton of questions over here, I am going to use this as a venue to answer them.
As there is a lot going on with regard to the Rentokil / Terminix transaction, I am going to focus on that today. Last week, I attended Rentokil's European debt capital markets roadshow to raise debt capital for the pending transaction and general corporate purposes. Those notes priced yesterday, and we'll discuss that below in greater detail.
Rentokil continues moving towards closing the transaction in a market that is getting increasingly more difficult to transact in (more on that below). However, I believe that the structure and price remains appropriate for both sides -- even in the current market -- and this merger is a value-creating proposition. As many of you have heard, Terminix completed the sale of Terminix UK and Pelias to Norvestor. This removes one of the last regulatory hurdles to getting the deal done. As advisor to Terminix on the transactions, I will not comment on these transactions until later this year. So instead, we'll discuss something else that I find to be more interesting.
In today's Weekly Market Update, we will discuss the following:
- The Rentokil / Terminix Acquisition Mating Dance Timeline
- Rentokil's Debt Capital Market Roadshow
- Global Pest Control M&A and Valuation Update
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1. The Rentokil / Terminix Acquisition Mating Dance Timeline
Below is an accurate timeline (with a few artistic embellishments at the beginning) of the events leading up to the “meeting of the minds” on the Rentokil / Terminix transaction.
Back in February 2022, Andy and Brett had a chat in Memphis where they revealed to the crowd some fun facts about themselves that were hitherto unknown.
Andy: “I'm a massive Taylor Swift fan, I should be keeping that secret. But in 2020 I got an email from Spotify that told me I was in the top 1% of Taylor Swift listeners in 2020. I know this is sad.”
Brett: “So that makes you a Swifty though…”
Andy: “I am a Swifty.”
Brett: “I'm kind of a Swifty too.”
I think it's commendable that Andy was able to best millions of teenage girls around the world in reaching the heights of Spotify's top 1% of Taylor Swift listeners.
In all seriousness, it’s great that these two guys don’t take themselves too seriously.
Andy has been nothing short of spectacular as CEO at Rentokil Initial. Brett is the most genuine, sincere and capable CEO that I’ve seen at the helm of Terminix in my tenure in the industry.
As I’ve said on The Buzz, this transaction will unlock tremendous value for both shareholders of Rentokil and Terminix and I am excited to see it get done.
With that said, corporate action timelines are boring, so I had a little bit of fun with this. Andy and Brett, you’ll have to excuse my Taylor Swift, Fleetwood Mac and Notting Hill references, but it was mind-numbingly boring without them (as you'll see when I finally give up on the story and print just the facts).
There have been a lot of questions about the Rentokil / Terminix acquisition mating dance.
Who popped the question first?
Were there others?
Or was it exclusive?
How long were they dating behind our backs?
Well, you asked, so here it is...
February 2018 - Looking for Love in All the Wrong Places
- Perhaps it was a lonely Valentine’s Day in 2018—I am not exactly sure what kicked it off—but Terminix’s board decided that it would approach Rentokil about a possible transaction.
- On May 4, 2018, the two companies signed a mutual nondisclosure agreement and had some high-level discussions.
June 2018 - You Can Go Your Own Way ... You Can Call It Another Lonely Day
- After a few weeks of dating...never getting too serious…the parties called off this budding romance in June of 2018.
- Terminix decided to instead focus on the spinoff of American Home Shield.
October 2018 - The Divorce is Final ... I'm Single
- On October 1, 2018, Terminix completed the spin-off of American Home Shield allowing the company to take another substantial step in being a standalone, publicly-traded pest control company
June 4, 2020
- On June 4, 2020, Jamie Clement, equity research analyst who has covered the pest control industry for decades, joined us on The Boardroom Buzz. On that episode, I commented that if there was one buyer out there for Terminix, it would be Rentokil. If you want to listen to it, it's The Boardroom Buzz Episode 6.
September 30, 2021 - Love Story
- On the cool, crisp evening of September 30th, Andy Ransom's mind was restless. He decided to go for an evening stroll through London. He put in his AirPods, dialed in Taylor Swift and headed over to Hyde Park, as he had done countless times before when he just wanted to relax his mind.
"...you talk to your friends, talk to my friends, talk to me, but we are never ever, ever, ever getting back together again." Although Andy had always found the sweet sound of Taylor's voice to be soothing, tonight was different. Something was off.
As he rounded the south end of the park near the Diana Memorial Fountain, he did something he's never done before. He looked down at the Spotify app on his iPhone and without thinking, he pushed Spotify's "Discover Something New" button. Hoping to hear something new, it was not to be. There she was, in a song he hadn't heard for months... Love Story
"I got tired of waiting
Wonderin' if you were ever comin' around
My faith in you was fading
When I met you on the outskirts of town, and I said
Romeo, save me, I've been feeling so alone
I keep waiting for you, but you never come
Is this in my head? I don't know what to think.
He knelt to the ground and pulled out a ring
And said, "Marry me, Juliet
You'll never have to be alone
I love you and that's all I really know
I talked to your dad, go pick out a white dress
It's a love story, baby, just say, "Yes""
Just because it didn't work out in 2018, didn't mean that it couldn't be different now... with Brett. Brett would understand that Rentokil and Terminix were destined to be together and it was Taylor telling Andy exactly what he needed to do... call him.
October 1 & 4, 2021 - I'm Just a Boy, Standing in Front of a Boy
- The next morning, Andy woke up and placed a call to Naren K. Gursahaney, chairman of the Terminix board of directors. "Damnit," he thought to himself. I probably shouldn't call someone in Memphis at 8 a.m. London time and quickly hung up the phone.
- On October 4th, he reached out directly to Brett Ponton. Andy indicated that Rentokil Initial could be in a position to submit a formal proposal for a transaction in the coming weeks. We can never be 100% sure what was said on that fateful video call, but this is exactly how I imagine it went:
Brett: Can I just say no to your... kind request and, uh, leave it at that?
Andy: Yes. Fine. Of course. I-- Of course. I'll just be going, then. It was nice to see you.
Brett: The thing is, with you I'm in real danger. It seems like a perfect situation, apart from that foul temper of yours. But my relatively inexperienced heart would, I fear, not recover if I was once again cast aside, as I would absolutely expect to be. There are just too many pictures of you, too many films. You'd go and I'd be, uh, well, buggered, basically.
Andy: That's really a real no, isn't it?
Brett: I live in Memphis. You live in Notting Hill. Everyone in the world knows who you are. My mother has trouble remembering my name.
Andy: Fine. Fine. Good decision. Good decision. The fame thing isn't really real, you know? And don't forget I'm-- I'm also just a boy…standing in front of a boy...asking him to love him. Good-bye.
October 5 & 10, 2021 - This is Love
- On October 5, 2021, Andy and Brett continued their discussion of a potential strategic combination of Terminix and Rentokil Initial.
- On October 10, 2021, Andy shared with Brett a presentation summarizing the strategic and financial rationales for a transaction.
October 11, 2021
- On October 11, 2021, the Terminix board of directors convened a meeting together with members of management and representatives of Lazard and Wachtell Lipton.
- Representatives of Wachtell Lipton provided an overview of the Terminix board of directors’ duties with respect to the approach from Rentokil Initial. Representatives of Lazard reviewed preliminary financial analyses regarding Terminix based on, among other factors, unaudited prospective Terminix financial information provided to Lazard on October 7, 2021 that Terminix management had prepared in the ordinary course as part of the Terminix strategy plan and that had been reviewed by the Terminix board of directors on September 1, 2021, and preliminary financial analyses regarding Rentokil Initial.
- The Terminix board of directors discussed a range of potential responses to Andy's inquiry and instructed Brett to contact Andy to express Terminix’s willingness to consider a proposal for a transaction from Rentokil Initial if it valued Terminix appropriately and provided an acceptable level of certainty of completion. Brett communicated the Terminix board’s message to Andy, who said his expectation that Rentokil Initial would submit a formal proposal in the coming weeks.
October 13, 2021
- On October 13, 2021, Brett, Terminix’s Chief Financial Officer Robert Riesbeck, and Senior Vice President Dion Persson, Strategy and Mergers and Acquisitions of Terminix , had a call with Andy, Rentokil Initial’s Chief Financial Officer Stuart Ingall-Tombs, and Rentokil Initial’s Group M&A Director Chris Hunt to convey their interest in a potential transaction at an appropriate valuation and to discuss Rentokil Initial’s view of the strategic benefits of a combination of the two companies’ businesses.
October 14, 2021
- On October 14, 2021, the Terminix board of directors met with members of management and representatives of Lazard and Wachtell Lipton. An update was provided regarding Brett’s conversation with Andy.
- Representatives of Lazard then reviewed with the board a list of potential counter parties that could be interested in pursuing a strategic transaction with Terminix, including an industry participant (“Party A”) and two private equity firms (“Party B” and “Party C”).
- The Terminix board of directors discussed various considerations associated with reaching out to and pursuing a transaction with these parties in addition to continuing discussions with Rentokil Initial regarding a potential transaction.
October 21, 2021
- On October 21, 2021, the Terminix board of directors, together with members of management and representatives of Lazard and Wachtell Lipton, held a meeting to further discuss the possibility of engaging with Rentokil Initial and other third parties regarding a potential transaction.
- Representatives of Lazard shared their preliminary perspectives on valuation and the financial aspects of a transaction with Rentokil Initial based on, among other factors, an assumed amount of $175 million of annual pre-tax cost synergies (sensitivity cases were included if estimated pre-tax cost synergies were increased or decreased by $25 million) and updated unaudited prospective Terminix financial information provided to Lazard on October 19, 2021, that Terminix management had prepared to reflect, among other factors, Terminix’s actual financial results for the period from July 1, 2021, through August 31, 2021.
- Representatives of Wachtell Lipton also discussed regulatory and other legal considerations pertinent to a potential strategic combination.
- The Terminix board of directors considered these perspectives along with the opportunities and risks associated with continuing to operate Terminix on a standalone basis and other strategic alternatives.
- The Terminix board of directors also considered the possibility of contacting other parties to ascertain their potential interest in a transaction with Terminix. These parties included Party A, Party B and Party C, who, in the judgment of management and Lazard (after considering the landscape of potential parties, the probability of such parties’ interest in a potential transaction and the industry in which Terminix operates), were the most likely parties other than Rentokil Initial who could reasonably be expected to be interested in pursuing a transaction with Terminix and would not face significant execution risk in consummating a transaction while also not introducing significant leak risk.
- The Terminix board of directors then instructed management and representatives of Lazard to contact Party A, Party B and Party C to ascertain their potential interest in a transaction, while continuing to engage in discussions with representatives of Rentokil Initial.
- In light of the aforementioned considerations and the execution and leak risks associated with a broader outreach effort, the Terminix board of directors determined not to contact other parties at the time.
- Shortly following the meeting, representatives of Lazard contacted representatives of Party A, Party B and Party C to inquire as to their potential interest in a strategic transaction with Terminix.
- Representatives of Party A and Party C expressed preliminary interest in a potential transaction, while Party B’s representatives indicated shortly afterwards that they did not believe that Party B could make a proposal that would be competitive on valuation and thus would not be interested in further exploring a transaction.
October 29, 2021
- On October 29, 2021, Brett and Dion met with Andy to discuss a potential transaction between Terminix and Rentokil Initial. Andy orally conveyed the terms of a proposal by Rentokil Initial to acquire Terminix, a written copy of which was delivered to Brett and Dion after the conclusion of the meeting.
- The proposal contemplated an implied purchase price of $54.00 per share of Terminix common stock consisting of approximately 80% stock and 20% cash.
- The proposal also contemplated that Terminix stockholders could elect to receive all cash or all stock merger consideration, subject to proration in the event of oversubscription, and that the consummation of a transaction would not be subject to any financing contingency.
- In addition, Andy raised the possibility that a member of the Terminix board of directors would be appointed to Rentokil Initial’s board of directors upon the closing of a transaction.
- On the same day, Terminix and Party C entered into a non-disclosure agreement containing customary standstill restrictions on Party C (which restrictions would terminate in the event Terminix entered into a definitive agreement for a merger with a third party).
November 2, 2021
- On November 2, 2021, representatives of Party A contacted Lazard to indicate that, after further consideration of Party A’s strategic priorities and concerns over its ability to integrate the Terminix business in light of those priorities, Party A was not interested in further exploring a potential strategic transaction with Terminix.
- Shortly thereafter, the Terminix board of directors met with members of management and representatives of Lazard and Wachtell Lipton. The Lazard representatives provided an overview of the terms of Rentokil Initial’s proposal as well as an update on the status of Terminix’s outreach efforts to Party A, Party B and Party C. The Terminix board of directors then instructed management and Lazard to communicate to Rentokil Initial that the board appreciated the seriousness of Rentokil Initial’s proposal but was keenly focused on deal certainty, upfront price and overall value creation for Terminix stockholders, and that Terminix would be willing to share certain due diligence materials, subject to the execution of a mutually acceptable confidentiality agreement, to enable Rentokil Initial to refine its assessment of the potential value of a combination.
- Brett subsequently contacted Andy to convey the board’s message.
- The Terminix board of directors also authorized management to continue outreach efforts with Party C.
November 5, 2021
- On November 5, 2021, Terminix and Rentokil Initial entered into a mutual nondisclosure agreement superseding (and which was substantially similar to) the nondisclosure agreement previously agreed to by the parties on May 4, 2018.
- Shortly thereafter, representatives of Rentokil Initial began submitting due diligence requests and, on November 9, 2021, the Terminix board of directors held a meeting at which representatives of Lazard reported on the process for addressing these requests.
- In the following weeks through December 8, 2021, and with the authorization of the Terminix board of directors, representatives of Terminix provided Rentokil Initial with access to a virtual data room, hosted diligence sessions for the benefit of Rentokil Initial and responded to numerous diligence requests and questions.
- Representatives of Rentokil Initial also provided Terminix with access to a virtual data room containing various due diligence materials and hosted due diligence sessions with representatives of Lazard and members of Terminix management, including a discussion between representatives of Lazard and Rentokil Initial’s financial advisers, Barclays and Goldman Sachs International, regarding Wall Street research analyst financial forecasts and consensus estimates relating to Rentokil Initial.
November 10, 2021
- On November 10, 2021, Brett along with other members of Terminix management hosted a management presentation for the benefit of Party C at which they reviewed Terminix’s corporate strategy and business and financial performance and addressed questions from representatives of Party C.
- Representatives of Terminix also made due diligence materials available to representatives of Party C.
November 16, 2021
- On November 16, 2021, the Terminix board of directors met to discuss the status of Terminix’s ongoing due diligence discussions and workstreams, as well as an illustrative timetable for negotiating transaction documents and announcing a transaction.
November 18, 2021
- On November 18, 2021, representatives of Party C contacted Lazard to express that Party C was no longer interested in pursuing a potential transaction with Terminix in light of concerns over execution risk and its ability to make a proposal that would be competitive on valuation.
November 19, 2021
- On November 19, 2021, representatives of Davis Polk & Wardwell LLP (“Davis Polk”), Rentokil Initial’s legal counsel, circulated a draft merger agreement to representatives of Wachtell Lipton. The draft reflected the transaction and purchase price structure contemplated by Rentokil Initial’s October 29th proposal and included, among other terms, a “fiduciary out” provision that would permit the board of directors of either party to change its recommendation in the event such party received an alternative acquisition proposal from a third party under certain circumstances, but without providing a right of either party to terminate the agreement to enter into an alternative acquisition proposal, and also provided for an unspecified termination fee amount payable by each party in the event of a change of recommendation or, in the case of Terminix, if Terminix entered into a definitive agreement with a third party within 12 months following the termination of the agreement in certain circumstances.
- The draft merger agreement also contemplated that one member of the Terminix board of directors (to be designated by Rentokil Initial) would be appointed to Rentokil Initial’s board of directors upon the closing of a transaction. The draft agreement noted that the terms of the parties’ respective obligations to obtain any regulatory approvals required for the consummation of a transaction would be determined at a later time following further analysis and discussion.
November 23, 2021
- On November 23, 2021, the Terminix board of directors convened a meeting, together with members of management and representatives from Lazard and Wachtell Lipton. Management and representatives of Lazard provided an update regarding the status of Terminix’s ongoing discussions with Rentokil Initial and outreach efforts to Party C.
- Representatives of Wachtell Lipton reviewed the terms of the draft merger agreement provided by Davis Polk with the Terminix board of directors. The Terminix board of directors discussed, among other things, the regulatory processes associated with a strategic combination and the merger agreement’s provisions addressing deal certainty. The Terminix board of directors was of the view that, while Rentokil Initial’s proposal was attractive from a financial perspective, management should seek to further improve the financial and other terms of the transaction. After consideration of the feedback from Party A, Party B, and Party C and the aforementioned execution and leak risks associated with a broader outreach effort, the Terminix board of directors decided not to contact any other parties with respect to a transaction and directed management, in consultation with Lazard and Wachtell Lipton, to continue discussions with Rentokil Initial to determine if the parties could reach agreement on mutually acceptable terms.
- Through the subsequent two weeks, members of management and representatives of Lazard and Wachtell Lipton participated in multiple discussions with their respective counterparts at Rentokil Initial and its legal and financial advisors regarding the open financial and legal points between the parties.
- In addition, further revised drafts of the merger agreement were exchanged between Wachtell Lipton and Davis Polk, which reflected a number of changes to the terms proposed in the draft merger agreement circulated by Davis Polk on November 19, 2021, including the addition of a right by Terminix to terminate the merger agreement in the event it received an alternative acquisition proposal from a third party under certain circumstances.
- The parties also discussed the regulatory processes associated with a strategic combination and the merger agreement provisions addressing deal certainty. Members of Terminix management, directly and through representatives of Wachtell Lipton, proposed to Rentokil Initial a “hell or high water” framework under which the parties would be required to take any and all actions necessary to obtain any regulatory approvals required to consummate the transaction, including any divestitures of businesses, assets, properties or product lines of Terminix or Rentokil Initial. Representatives of Rentokil Initial conveyed that Rentokil Initial was not prepared to agree to such an uncapped obligation.
December 2, 2021
- On December 2, 2021, the Terminix board of directors met with members of management and representatives from Lazard and Wachtell Lipton to discuss the status of negotiations with Rentokil Initial.
- Management discussed the possibility of reaching out to Rentokil Initial to request that it increase its contemplated implied purchase price (in light of the increase in the market price of Rentokil Initial ordinary shares and the decrease in the market price of Terminix common stock that had taken place since Rentokil Initial’s October 29th proposal) and accept certain enhanced obligations to obtain any regulatory clearance required to affect the consummation of a transaction.
- The Terminix board of directors considered these perspectives and directed management, together with Lazard and Wachtell Lipton, to seek the enhancements discussed by management. Thereafter, members of management and representatives of Lazard and Wachtell Lipton engaged in further discussions with representatives of Rentokil Initial and its legal and financial advisors.
- As an outcome of these discussions, representatives of Rentokil Initial agreed to increase the implied purchase price to $55.00 per share of Terminix common stock (consisting of approximately 80% stock and 20% cash based on the price of Rentokil Initial ordinary shares at announcement) and to pay a termination fee to Terminix in the event a governmental authority entered an order relating to antitrust laws prohibiting the transaction or the parties failed to obtain required regulatory approvals under certain circumstances.
- After several rounds of discussions, Rentokil Initial representatives agreed to divestitures of businesses, assets, properties or product lines so long as they did not, in the aggregate, generate total revenues in excess of 12.8% of Terminix’s total revenues in the calendar year 2020.
December 6, 2021
- A regular meeting of the Terminix board of directors was held on December 6, 2021, at which members of management and representatives of Lazard and Wachtell Lipton updated the board as to their recent discussions with representatives of Rentokil Initial. The Terminix board of directors discussed, among other things, the limitations proposed by Rentokil Initial on its obligation to undertake divestitures or other remedies required to obtain regulatory clearance, and after consideration of the potential implications for deal certainty as well as other potential risks and benefits of the transaction, the Terminix board of directors determined to accept Rentokil Initial’s proposed limitation and directed management and Terminix’s advisors to work with their counterparts at Rentokil Initial towards finalizing the terms of a transaction, with the goal of announcing a signed merger agreement on December 14, 2021.
- Over the next several days, representatives of Wachtell Lipton and Davis Polk exchanged further revised drafts of the merger agreement to reflect these and other changes.
December 10, 2021
- On December 10, 2021, the Terminix board of directors met with members of management and representatives of Lazard and Wachtell Lipton to review the terms of the proposed merger agreement and to further discuss the potential risks and opportunities presented by the potential transaction.
- Representatives of Wachtell Lipton reviewed the fiduciary duties of the Terminix board of directors, and representatives of Lazard presented their financial analyses in respect of Terminix and Rentokil Initial and the financial aspects of a transaction based on, among other factors, further updated unaudited prospective Terminix financial information provided to Lazard on December 7, 2021, that Terminix management had prepared to reflect, among other factors, Terminix’s actual financial results for the period from September 1, 2021, through October 31, 2021. Following the meeting, representatives of Wachtell Lipton and Davis Polk continued to work towards finalizing the terms of the merger agreement.
December 13, 2021
- On December 13, 2021, the Terminix board of directors re-convened to consider whether to approve the merger agreement.
- Representatives of Wachtell Lipton updated the Terminix board of directors regarding certain terms of the proposed merger agreement that had evolved since the board’s prior meeting.
- Members of Terminix management then shared and discussed with the Terminix board of directors a copy of a draft press release proposed by Rentokil Initial to announce the transaction and describe its strategic and financial rationales, including, among other things, Rentokil Initial’s estimate of annual pre-tax cost synergies of at least $150 million.
- Representatives of Lazard then reviewed Lazard’s financial analysis of the transaction and delivered its oral opinion, which was subsequently confirmed by delivery of a written opinion dated as of December 13, 2021, to the effect that, as of that date and based upon and subject to the assumptions made, procedures followed, matters considered and qualifications and limitations on the review described in such opinion, the merger consideration to be paid to holders of Terminix common stock (other than holders of certain excluded shares as described in the merger agreement) in the transaction was fair, from a financial point of view, to such holders.
- The Terminix board of directors unanimously approved and adopted the merger agreement and resolved to recommend that the stockholders of Terminix adopt the merger agreement.
- After the meeting, Terminix and Rentokil Initial executed the merger agreement and, on December 14, 2021, issued a joint press release announcing the parties’ entry into the merger agreement.
2. Rentokil's Debt Capital Market Roadshow
Last Monday (13th of June) Rentokil kicked off its debt capital markets roadshow to raise approximate $2,016 million in debt capital to finance the Terminix acquisition and for general corporate purposes. You missed it? Don't worry, I attended in your stead... and you didn't miss much.
Rentokil is looking to float the following notes:
- EUR 850m - 5-Year Fixed
- EUR 600m - 8-Year Fixed
- GPB 400m - 10-Year Fixed
Rentokil's current medium-term note issues include:
- EUR 600m (2028s) - 0.500%
- EUR 500m (2026s) - 0.875%
- EUR 400m (2024s) - 0.950%
The notes are expected to be rated BBB (stable by S&P).
Rentokil's current bridge facility will take them to April 1, 2024, (including one extension) so there isn't tremendous pressure for them to get a deal done in this market. However, sooner is probably better than later as we expect credit spreads to continue widen as 2022 progresses.
It is becoming an increasingly difficult time to raise capital in this market. We will be watching this capital raise closely as I believe that it will have implications on M&A in the global pest control industry.
As we move into the pricing stage of this offering, I noticed this morning that Rentokil's credit-default swap spreads widened to 99 bps (+11 bps), the most since March 12, 2020. The notes priced yesterday (June 20, 2022) and the rates were smokers!:
- EUR 850m - 5-Year Fixed; 3.875% coupon, issues were sold at price of 99.586% at par with the yield of 3.968%
- EUR 600m - 8-Year Fixed; 4.375%, coupon, issues were sold at price of 99.663% at par with the yield of 4.426%
- GPB 400m - 10-Year Fixed; 5.000%, coupon, issues were sold at price of 98.37% at par with the yield of 5.213%
If there is anyone out there that doubts the cost of debt and equity capital is on the rise, just take a look at the rate delta between the current issuances and the fresh ones from yesterday.
3. Global Pest Control M&A and Valuation Update
Next week I will be publishing a lengthy Commentary on pest control M&A and valuation in 2022. For now, I've included an email that I sent out to our clients on March 5th, 2022. As you know, I want Potomac clients to be ahead of the curve. The ones that received this email and acted locked in early Q2 valuations, something that is only going down from here.
Reprint of Email to Potomac Clients
You are receiving this email because your email address is in our client database.
In Q4 2021, I sent you an email saying:
Since we published Supernova: M&A in the Late Stages of the Pest Control Consolidation Boom in July 2021:
- Valuation multiples have spiked, as we had suspected they would
- The largest companies in the industry are selling for between 13x and 18x EBITA (3.3x and 5.0x revenue), representing up to a 35% increase over the 2020 high at the high end of the range
- Keep in mind, this is for unique and scarce assets; however, the rising tide has certainly, without a doubt, floated all boats
Could this madness continue? Sure, it can go on for years. However, it’s becoming more and more apparent that this market is living on borrowed time and you have a lot more to lose on the downside than you do to gain on the upside.
Now in Q1 2022, we have begun to see the market roll over rapidly from its 2021 high in November.
- Terminix is officially out of the M&A market and Rentokil has slowed down dramatically in the US (still very active in Rest of World).
- Jarl Dahlfor, CEO of Anticimex stepped down last week as did Anticimex’s head of global M&A in Stockholm; we expect to see further changes in Stockholm.
- Over the last 30 days we have seen a dramatically increased level of selectivity amongst the acquirers… the good news is, the private market hasn’t rolled over yet, but every sign is out there that by this summer we expect to see valuations down 40% from the Nov 2021 peak (they have already trailed off 10% from the very high end of the market which peaked on Nov 25, 2021).
Over 20 years of indisputable, hard data demonstrates (see charts below) that private pest control market multiples correlate at 0.77 to public market valuations. Since peaking at all time high valuations in late 2021, the publicly traded comps are down:
Rentokil down -27.4%
Rollins down -15.2%
Terminix down -31.9%
As I write this email WTI crude oil is touching $127 / barrel, up from $76 / barrel on January. Fiscal spending (according to the Congressional Budget Office) is set to be $1.3 trillion less in FY 2022 than in FY 2021 (accounting for 6% of US GDP) and the Fed is prepared to hike policy rates beginning this month into an inverting yield curve and a decelerating economy. Basically, they are going to force a recession to slow down rampant inflation.
At debt / GDP of over 125%, we are beginning to witness some of the worst financial conditions that we’ve seen since the great financial crisis.
Although it’s impossible to say where valuations will be at the end of this year, I am heavily short: long-duration US equities (e.g., technology, consumer discretionary), long oil, and long gold [THIS IS NOT FINANCIAL ADVICE, I am just telling you that I am personally positioned to see equity valuations fall another 20% to 30% this year. This is the great reversion to the mean we discussed in Supernova (link above).
I will be publishing a Commentary on this soon, but I wanted you to hear it from me first. If you want to get out the door, do it NOW. Reply all (Franco is copied and is much quicker to respond than I).
Good luck out there…. Paul