Activist Nelson Peltz's Trian holds a stake in Rentokil, and here's how he could increase shareholder value.

Company: Rentokil Initial (RTO)

Rentokil Initial is a global company based in the UK that offers pest control, hygiene, and well-being services. They provide a comprehensive range of pest control services, from rodents to flying and crawling insects, as well as wildlife management. Additionally, they offer a range of hygiene services, including the provision and maintenance of products such as soap and hand sanitizer dispensers, hand dryers, air care and purification, cubicle and surface sanitizers, feminine hygiene units, toilet paper dispensers, and floor protection mats. Rentokil's connected devices, PestConnect, provide customers with a complete pest detection solution and full traceability.

The stock market value of RTO is approximately 11.3 billion pounds, with each share trading at 4.47 pounds. In the U.S., the stock also trades under the ticker "RTO," and closed at $29.01 on Friday.

Activist: Trian Fund Management

Percentage Ownership:  n/a

Average Cost: n/a

Nelson Peltz, the manager of Trian, runs a portfolio of 8 to 10 mid- to mega-cap, publicly traded companies. He actively engages with company management to enhance long-term shareholder value. Peltz's approach is called "operational activism," which involves working with underachieving companies to increase earnings by cutting costs, divesting non-core businesses, and improving brand recognition.

What's happening

Rentokil Initial has received a proposal from Trian to improve shareholder value.

Behind the scenes

In 2023, Rentokil Initial generated approximately 60% of its 5.3 billion pounds of revenue in North America, with 20% in Europe, 7% in the UK and sub-Saharan Africa, and the remainder in the rest of world. The core pest control segment generated 80% of revenue, with hygiene and wellbeing (16%) and France workwear (4%) making up the rest.

Rentokil, a leading pest control company, has experienced significant growth over the past decade, with a total return of 932% from 2011 to 2021, outperforming the UK FTSE 100 benchmark and S&P 500. In October 2022, the company acquired Terminix for $6.7 billion, increasing its revenue to $3.71 billion. However, the company has faced challenges in integrating the Terminix business, and on Oct. 19, 2023, its UK-traded shares fell 18% after the company warned of weakness in the U.S. market, difficulties in acquiring residential customers, and a slowdown in earnings growth. The company also lowered its guidance on North American adjusted operating margins from 19.5% to a range of 18.5% to 19%. Despite this, North America registered an 18.7% adjusted operating profit in the company's 2023 earnings, but shares continued to trade 30% lower than the pre-warning price.

Trian, a U.S. activist investor, has acquired a large stake in Rentokil and reached out to the company to discuss ideas and initiatives to improve shareholder value. Despite being largely thought of as a U.S. investor, Trian has consistently created shareholder value when engaging with UK companies. The firm has taken board seats at Janus Henderson, Pentair, and Unilever and has successfully advocated for strategic divestments at these companies. In its four previous activist campaigns in the UK, Trian has averaged a 32.01% return versus 9.79% for the MSCI EAFE Index.

Rentokil's intentions at Ferguson may be exemplified by Trian's campaign, which resulted in the sale of its UK business and a shift to the New York Stock Exchange. Ferguson has since delivered a 72% total return. Given that Rentokil generates most of its revenue in North America and is focused on expansion there, it may be a prime candidate for a similar shift.

Rentokil's discounted valuation (17x NTM earnings) compared to U.S. peers Ecolab (35x), Cintas (41.5x) and Rollins (46x), all of whom are domiciled in the U.S., suggests that a shift in listing location away from London could be justified to close the valuation gap. This has been a major theme for other activists recently, including Palliser's encouragement of Rio Tinto to collapse its dual-listed structure in favor of an Australian primary listing, and Cevian's successful persuasion of CRH to move to New York. Additionally, Pearson's CFO is on the board of Rentokil.

Shifting the business to the U.S. is a low-hanging fruit for value creation and potentially divesting the European business could create additional value. Trian is an excellent income statement activist that could help Rentokil and its shareholders improve the company's operating margins, stimulate revenue growth, and integrate the Terminix acquisition. In this situation, we expect that Peltz and Trian will work collaboratively with management behind the scenes to improve value and may seek board representation. At three of its four prior UK engagements, Trian has secured a board seat for a firm insider amicably without launching or publicly threatening a proxy fight. If the Rentokil board looks at Trian's other UK experiences and how it worked constructively with the boards of Pentair, Janus, and Unilever, the company will likely invite a Trian executive to serve on the Rentokil board.

Ken Squire is both the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.