After nearly 13 years of decline, Rentokil's recovery remains as uncertain as ever.
Back in the 1990s, there was a company called Rentokil Initial (LSE: RTO), whose CEO, Sir Clive Thompson, had gained the moniker of Mr 20%. Lucky Clive was given this name thanks to his habit of delivering 20% growth each year.
From boom to bust
Rentokil shareholders spent the 1990s in a happy daze, watching as Rentokil delivered stunning annual growth, mostly due to a series of ambitious acquisitions. In 1999, the company's share price reached its all-time peak of 480p.
On 18 August 1999 -- almost 13 years ago -- Rentokil missed its growth target for the first time in 17 years, sending its share price tumbling. The company announced that it would be disposing of some of its assets and spent £1.3bn buying back shares as its share price fell.
Since then, Rentokil's fortunes have never truly recovered. Despite making continual disposals, cuts and efficiency improvements, it has never really found the path back to growth -- and its £1.1bn debt pile is now approaching its £1.4bn market capitalisation.
The final humiliation came in October 2007, when Rentokil's share price began a year-long decline that took it from around 160p to just 38p.
Turnaround trio
Profits plunged 49% in 2008, and three top executives were brought in to turn Rentokil around. Alan Brown, John McAdam and Andy Ransom did the job at ICI, but they have yet to prove whether they can deliver for Rentokil -- or whether Warren Buffett will have the last word:
"When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is usually the reputation of the business that remains intact."
I believe there are two main elements to Rentokil's problems:
- Debt -- The company's long-term debt now exceeds £1bn and its interest payments exceed its operating profit.
- City Link -- Rentokil acquired its City Link courier business in 2006 and it has been a persistent source of losses. In the first six months of 2011 alone, it contributed 11% to group revenues but lost £17.8m against gross profits of £93.2m.
- Slow growth -- Although the remainder of Rentokil's businesses are profitable, growth is lacklustre.
A nasty hangover
I think Rentokil should start by selling City Link and then focus on organic growth in its core businesses, using all of its profits to pay down its debt. This would be a slow process at best, but it might just work.
However, a quicker alternative might be to break up and sell the whole group -- the approach Rentokil chairman John McAdam used successfully with ICI, which had similar problems.
As I write, Rentokil is trading at around 80p. Most brokers are expecting the company to announce a loss when it publishes its results on Friday but, to be honest, even if it turns a small profit, it won't be enough to signify a major change in the company's fortunes.
Rentokil's story is similar to that of many other companies -- and individuals -- who have binged on borrowed money, believing in the impossible mantra of never-ending growth. Its recovery will be a slow, painful process -- and it may just be too late.
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