Support services group Interserve (IRV) has proposed to buyRentokil Initial's (RTO) facilities business for £250 million, sending its share price up 3.4% to 594.25p. It has raised £74.8 million to help fund the deal, placing new shares at 580p which is a premium to the preceding day's closing market price.
While the deal is said to be earnings enhancing, it is worth considering that analysts weren't sure Rentokil was going to be able to sell the business whose biggest client is London Underground. We're therefore surprised to see the seller's shares fall 1% to 125.2p as investors should be relieved that it has found a willing buyer in Interserve.
Adjusted operating profit in the Rentokil unit fell by 13.1% in 2013 and was the weakest part of its business. Interserve will find cost savings from owning the business due to having increased scale but it will also inherit commoditised services, so perhaps raising the risk profile of its activities.
Liberum Capital reckons there's only limited synergies. It adds: 'The acquisition is complimentary (80:20 private:public). Initial has had a problematic history and has been up for sale for a while. It tends to have smaller, shorter (three year average) and simpler contracts, with comparable margins. The concern will be that Initial has a high percentage of single service contracts, which is at risk of commoditisation. However, the deal should be low risk given that Interserve knows the industry well.'
The Rentokil unit employees 25,000 people and undertakes activities like cleaning, catering, security, mechanical and electrical building maintenance. It will make Interserve the third biggest facilities management player in the UK.
Coinciding with the acquisition news is Interserve's full-year results whose profit numbers are slightly misleading thanks to a one-off cash injection last year from property and investment disposals, hence why there appears to be a big fall in profit this year. If you just focus on the headline pre-tax profit, there's a 7.7% gain to £86.7 million. The full-year dividend is up 4.9% to 21.5p.
