Business Analysis: Sir Gerry takes a tilt at Rentokil, but is he the right man for the job?

The calm of passing time on his Donegal estate, building boathouses, painting landscapes and playing with his two younger children will have to be put on hold for a while.

Sir Gerry is drawing up a takeover plan that will involve Rentokil shareholders swapping their existing shares for those in Raphoe Management, a takeover vehicle he launched last month.

Rentokil's long-suffering investors are basically being asked to back a new management team, led by Sir Gerry, and throw over the incumbent team of chairman Brian McGowan and chief executive Doug Flynn, who has been in the job for only four months.

No more details are available and Sir Gerry's plans for Rentokil will not become clear until he and his advisers at Europa Partners, led by David von Simson, have decided to proceed with a formal offer.

But is Sir Gerry the right man for the job? That's the question Rentokil shareholders will have to answer for themselves when they come to do their final analysis should a Raphoe offer be forthcoming.

The share-price charts paint a picture of Sir Gerry's achievements as a businessman. His main legacies are Compass Group, the contract catering business, and ITV, the merged Granada and Carlton commercial television business. He was also chairman of Allied Domecq, the global wine and spirits group, that succumbed to a £7.4bn takeover bid from its arch rival Pernod Ricard earlier this year.

The chart shows the share price of Granada up to the point where the merger with Carlton came into effect, when Sir Gerry finally stepped down as a non-executive of the company. He had previously held both the chief executive and chairman's posts at Granada, having joined in October 1991 from Compass Group.

Granada and Compass came together in 2000 for a short-lived merger in a piece of corporate engineering that allowed Granada's hotels and motorway service stations to be merged with Compass's catering operations. Granada was later refocused as a pure media group and the two parts were then quickly demerged in February 2001.

As the charts show, the value of both Granada and Compass after they were unbound was, overall, relentlessly downward, destroying shareholder value in the process. Was this a result of ill-conceived corporate manoeuvring in the first place or have the two companies been the victim of circumstances beyond their control?

Our share price charts don't show the performance of ITV after the subsequent Granada Carlton merger in 2003. After shares in the combined ITV group started trading at 148p, they slumped to 96.75p in August last year. Since then they have enjoyed a recovery and now stand at 119.5p thanks to the presence of a takeover premium, some patchy advertising recovery and a generous regulatory environment.

But Compass, post-Robinson, has suffered rather more fundamental problems, suffering the ignominy of publishing profits warnings and struggling to integrate some of its later acquisitions. Since it emerged from the brief Granada-Compass merger, the shares have pretty much collapsed, falling from 550p to 246.5p in five years.

However, whatever the recent history of Sir Gerry's business legacies, perhaps the most salient point for Rentokil shareholders to remember is that the one-time chairman of the Arts Council was long gone, at least from full-time involvement, in the two companies once they started running into problems.

Sir Gerry, the argument goes, has always got his timing right and in business, as in stock-market investing, timing can be everything.

He led the biggest management buyout of its time in 1988 with the £160m deal to extract Compass from Grand Metropolitan. This he then floated in December of that year, making him his first fortune with a company whose share price had doubled by the time he left in 1991 to take up the reins at Granada.

The 1990s bull market powered the Granada share price, more than tripling it in the five years he was chief executive, culminating in his successful hostile bid for Sir Rocco Forte's hotel empire. On the back of that deal, he stepped up to become chairman of Granada, promoting Charles Allen to the chief executive's seat and beginning the media's "Charles & Gerry" obsession.

For much of 1997, the Granada share price fell as investors questioned the long-term value of the Forte deal. But the technology, media and telecoms bubble was then just beginning to inflate nicely. It helped lift the Granada share price in the last quarter of 1997, and the bull market had just peaked when Sir Gerry announced in May 2000 that he would be withdrawing to a simple non-executive's role.

So Sir Gerry has got his timing right throughout his career, including his short stint as chairman of Allied Domecq. But he did oversee annual increases in profits and dividends at both Compass and Granada for as long as he was running those businesses as chief executive. His time as chairman of Granada was similarly blessed, although shareholders can rightly blame him and Mr Allen, along with Michael Green at Carlton, for the £1bn plus of shareholders' money squandered on ITV Digital, originally known as Ondigital. The digital terrestrial television service eventually went bust, unable to honour its contract to the Football League, forcing dozens of small clubs into financial hardship.

Sir Gerry's tenure at the top has always been associated with deals, be they the series of acquisitions which helped build both Compass and Granada or the one-off mega-bids that saw Allied Domecq sold off. Deals, both acquisitions and disposals, are bound to be part of Sir Gerry's Rentokil plan.

It also seems certain that Sir Gerry will be bringing on board a small management team to help him transform the business.

If he is true to form, Sir Gerry will want to orchestrate a Rentokil turnaround from a bit of a distance, as far as he can. He prefers to conduct from a podium that allows him to make a distinction between leadership and management, delegating as much of the detail to people more suited, and willing to deal with, the nitty-gritty than himself. As lecturers at business schools will tell you, leadership is about coping with change while management is about coping with day-to-day complexities; Sir Gerry is more of a leader than a manager.

So if a Raphoe offer is forthcoming, Rentokil shareholders interested in the form book should back it. Sir Gerry normally gets his timing right and in a 20-year career running companies has been associated with perhaps just two big clangers - the Forte deal and Ondigital.

But they could simply steal his ideas, when they appear, and make the incumbent management carry them out, which is what happened when Hugh Osmond, the private-equity entrepreneur, tried to buy Inter-Continental hotels. Either way, shareholders will probably win from Sir Gerry's involvement.

Comments