The Competition and Markets Authority (CMA) has bared its teeth for the third time this week with the threat of an in-depth investigation into the sale of Mitie's (MTO) pest control business to Rentokil Initial (RTO) in October 2018.
This is the latest in a lengthening list of mergers targeted by an apparently more aggressive UK competition watchdog.
Other companies to fall foul of the UK regulators include very recent pricing-fixing claims leveled at equipment rental firm VP (VP.), blocking the planned merger of UK big six energy suppliers SSE (SSE) and Npower, plus ongoing investigations into funerals, hotel booking websites, car and home insurers, the big four UK accounting firms, and perhaps most closely watched, the proposed merger of supermarket giants Sainsbury (SBRY) and Asda.
But the CMA's remit is wide ranging and includes overseas companies' UK operations too.
This explains ongoing probes into companies many UK investors will be less familiar with, such as Japanese piano supplier Casio being found guilty of breaking competition law in online sales.
A joint business agreement between International Airlines Group (IAG), parent company of British Airways and Iberia, and US carrier American Airlines
The acquisition of Wildlife Holdings by Anschutz Entertainment of the US and UK private equity firm Onex Corporation
Ecolab’s purchase of Holchem Group
Iconex’s purchase of Hansol Denmark
Enterprise Rent-A Car’s acquisition of SHB Hire
WHY RENTOKIL IS IN THE FRAME
Mitie announced that it had sold its pest control business to Rentokil for £40m on a debt-free, cash-free basis.
The business generated earnings before interest, tax, depreciation and amortisation (EBITDA) of £3.2m in the year to 31 March 2018. That means Rentokil paid roughly 12.5-times EV, or enterprise value to EBITDA. That was about in line with the rating of its own stock at the time.
A week after the announcement, the CMA revealed that it was investigating the deal on the basis that it could result in ‘a substantial lessening of competition within a market or markets in the United Kingdom.’
Scroll forward six months and the regulator says that because the two firms are among the top four suppliers of pest control services in the UK, ‘there could be a substantial reduction in competition, which may lead to higher prices or reduced quality for customers that primarily use a single provider across the whole or a large part of the UK.’
Not only that but competitors are ‘unlikely (to) expand or enter the market in a timely manner and offset the loss of competition caused by the merger.’
It has given Rentokil until 23 April to offer ways to address its concerns about competition, otherwise it will launch an in-depth investigation into the merger which would likely delay the deal until much later this year.
Rentokil shares are flat at 365p, while Mitie shares are down 1% to 118p.