McGowan's Rentokil rescue plan fails to impress

Conglomerate's shares fall as break-up is ruled out by acting chief executive
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Brian McGowen may be newly installed as Britain's rat-catcher-in-chief, as head of Rentokil Initial, but he refused to do the City's dirty work yesterday. The easy crowd-pleaser would have been to announce a partial or wholesale break-up of the support services conglomerate. Instead, reporting the outcome of a review, he put forward a strategy of investing in the existing business and make acquisitions.

Brian McGowen may be newly installed as Britain's rat-catcher-in-chief, as head of Rentokil Initial, but he refused to do the City's dirty work yesterday. The easy crowd-pleaser would have been to announce a partial or wholesale break-up of the support services conglomerate. Instead, reporting the outcome of a review, he put forward a strategy of investing in the existing business and make acquisitions.

"The current problems are operational, not structural," he concluded. The response to this message in the City was lukewarm at best and openly hostile in many quarters. Rentokil shares closed down 4 per cent.

Matthew Smith, an analyst at Deutsche Bank, said: "We see the outcome as very disappointing. It only covered softer issues and is simply the latest in a long line of reviews."

Mr McGowan, who has sacked the chairman and chief executive of Rentokil this year, was left trying to convince investors that his plan was "radical". He said that not a single Rentokil investor he had spoken to since becoming executive chairman in May had wanted a total break-up, while only "one or two" wanted some non-core disposals.

The McGowan plan will devolve power in the group so that decisions are taken at the local level. A centralised group corporate culture "had become stifling", he said, making decisions slow and remote from the operational problems.

The company would press on, with acquisitions at the top of the agenda, he said. It would put in place more effective incentives for staff, investment in IT and better exploit its inventions and intellectual property. "I can assure you that this is as radical as it gets. This is not a soft option. This is shaking the whole business to its roots," he told a press conference.

His argument was that Rentokil was not a case of a core business being held back by underperforming peripheral interests. "The key to future growth is not divestment potential, it is in getting the businesses working more effectively and more efficiently. This is what I have already started to do," Mr McGowan said.

As pressing for the City was evidence from the interim results, also released yesterday, that showed all parts of the Rentokil empire were deteriorating. Pre-tax profits were down 10 per cent at £180m, with the hygiene division suffering particularly badly.

The City likes focused companies these days and Rentokil has eight divisions. While it is not like the big conglomerates that were popular in the 1980s - the likes of Hanson, Williams (where Mr McGowan made his name) and Tomkins, which truly were spread over completely disparate activities - it is still a collection of businesses, even if its interests are all in support services.

David Allchurch, an analyst at Morgan Stanley said: "We believe that greater focus of the portfolio would allow management to concentrate on a few problems rather than the multitude it faces. The acting chairman appears to want to accelerate acquisitions, which we feel is hardly appropriate for a group with unstable organic operational trends."

Rentokil's activities range from pest control (hence the rat-catcher sobriquet), to security guards to providing and maintaining washroom facilities and tropical plants in offices.

At the heart of the boardroom bust-up that saw the chairman and former chief executive Sir Clive Thompson ousted in May was his desire to sell off two smaller businesses, parcels and conferencing. These came to be owned by Rentokil in the days when Sir Clive was chief executive (he joined in 1982) and took the company on a massive acquisition run, expanding it from its original pest control base.

Sir Clive, who moved up to the chairman post last year, wanted to use the sale money to buy companies in Rentokil's two big markets, hygiene (washrooms) and security. He believed these divestments could raise up to £750m, but did not want to break up the company.

James Wilde, who was promoted to chief executive last year, did not agree. Mr McGowan and the board sided with Mr Wilde and forced out Sir Clive. Curiously, the board then ditched Mr Wilde weeks later.

Although Mr McGowan admitted yesterday that the strategy he was promoting was similar to that pursued by Mr Wilde, he said that he was not acting fast enough and implementing the changes broadly enough. Others suspect that shareholders agreed with Sir Clive's divestments approach, making Mr Wilde's position untenable.

Hanging over Rentokil is the spectre of Hays, another support services conglomerate that was recently caught without a chief executive and a firm strategy, allowing the business to drift. Mr McGowan said he had a plan and would play the role of chief executive until a candidate for the position was recruited. (Headhunters are working on it).

Many believe that Rentokil looks vulnerable to a bid, given the City's reaction to the company's strategy, the collapse in the share price this year and the missing chief executive. Even more seem to be convinced that the company will ultimately be broken up, whatever it now says.

Mr McGowan yesterday gave himself until the end of next year to show results. He can be sure the City will hold him to that.

Sir Clive Thompson's verdict: the shareholders deserve better

Sir Clive Thompson's shadow still hangs over Rentokil and his verdict on the company's strategic review yesterday was damning.

"Shareholders deserve better than this," said Sir Clive, who owns nearly £9m of company stock. Although his criticism was hardly unexpected, given the way he was forced out of the chairman's job earlier this year, it seemed to tally with that of many independent commentators.

Sir Clive told The Independent: "I am extremely surprised that this strategic review is substantially a restatement of old operational initiatives. I believe shareholders were demanding a proper strategic review."

Shareholders were expecting a review that would "involve the need to focus on the company's core activities such as hygiene and security" and the disposal of other "peripheral" businesses, he said. Parcels and conferencing both came with large businesses that Rentokil acquired, so the company never properly took the decision to enter these markets.

"The world has changed. Investors want more and more focus," he said.

Many of the rumours of a bid for Rentokil in recent months have been linked with Sir Clive, with the backing of private equity groups. The former president of the Confederation of British Industry, said he had "no comment to make" on the bid speculation. "I'm ruling nothing in and nothing out," he said.

He did see a good chance of a bid coming in. "If present management does not deliver, I'm sure others will."

Sir Clive said three opportunities interested him. First was the prospect of the chairmanship of a major company Secondly, there was a chance of heading up a private equity business and thirdly and perhaps most intriguingly, he was considering starting up a new business.

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