The Investment Column: Acquisition spree by Rentokil fails to thrill investors

Alba; Trafficmaster
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Our view: Sell

Current price: 167.5p

There was a time when pest control and washroom services group Rentokil was regarded as the benchmark for any corporate achiever.

Its former chairman Sir Clive Thompson was known as Mr Twenty Per Cent for his ability to hit new growth peaks every year. But it all ended in tears as it ran out of steam in the face of increasing competition and spending cuts by customers.

Private equity groups are rumoured to have flirted with the idea of a bid, but Rentokil remains in play although there are once again stirrings on the share register. US activists ValueAct Capital, run by Jeff Ubben, a former Fidelity fund manager, has emerged with a 3 per cent holdings and tongues are wagging again.

The trouble is that Rentokil has appeared to be on the cusp of recovery for several years but has stubbornly failed to meet expectations. After seeing off an attempt by former Granada boss Gerry Robinson to install himself as executive chairman and return cash to shareholders in 2005, the group has aggressively restructured itself.

It's sold burglar alarm and manned guarding operations and buying almost 100 businesses since the start of last year focussing on its rat-catching, plants and parcel delivery.

The spending spree continued yesterday with the acquisition for £19m of Lancaster Office Cleaning which has major contracts in the city of London and Canary Wharf. As with many Rentokil deals, it flags up the prospect of cross-selling its other services such as washrooms and office plants but that is often easier said than done.

The city seemed underwhelmed, one broker suggesting the money could have been better spent building up Rentokil's operations in the Far East.

Rentokil has already dampened prospects for the current year warning that profits would be in line with 2006. The reason is that companies acquired are weaker in the first quarter. It is also feeling the impact of higher interest charges.

The shares are helped by a 4 per cent yield and the hopes of a bid or a break-up. But there is more excitement to be had elsewhere. Sell.


Our view: Highly speculative

Current price: 152p

Consumer electronics group Alba is biting the bullet and shedding hundreds of millions of turnover to concentrate on one business. It's a dangerous strategy.

In its present unwieldy shape, the group no longer makes sense, chalking up 12-month losses of £44m on sales of £565m.

So Alba is carrying out a major restructuring. It will concentrate on a smaller range of well-designed, high definition televisions, DVDs, set-top boxes and digital audio equipment. They will be attractively priced just above own-label equipment, but below premium brands.

Within two years, so the thinking goes, the business shrunk from six divisions to one and built around well-known names such as Bush and Goodmans, should be capable of margins of around 6-7 per cent and thereby generating profits of close to £5m on sales of £275m.

Drastic surgery will see the sale of the leisure division, selling £130m of toasters to hair curlers, for perhaps £60m. Alba frankly admits the two business models are no longer compatible.

Alba's 50 per cent stake in the loss-making Grundig business, weakened by poor quality products and supply problems, is under review. A sale looks the most likely option and could fetch £30m. Another £20m will come from sales of surplus land.

The restructuring makes sense. The big issue for shareholders is whether they think the new-look consumer electronics business is viable. Alba says big UK retailers have warmed to the idea of a new medium-priced range of televisions and audio equipment.

Well, they would, but with consumer spending being squeezed, forecasting demand for electrical goods two years down the road is highly speculative. Highly speculative.


Our view: Hold

Current price: 58.5p

Trafficmaster's sat-nav equipment helps drivers find their way and to avoid traffic hot spots. But if you are stuck in a queue, rest assured that the company is still doing its best to help. Yesterday it signed a £3m deal with the Government to provide it with journey time data, using the company's network of 7,500 sensors on 8,000 miles of roads. The contract is part of the Government's plans to get traffic moving more quickly around the network. The deal certainly helped speed up the progress of Trafficmaster shares yesterday, which rose 10 per cent.

The company has been transformed since the dark days following the tech boom. Trafficmaster spent millions investing in equipment and struggled to earn a decent return. But the company has grown turnover in each of the past three years and is increasingly profitable, with analysts forecasting further significant improvements.

The question is how much further the stock has to rise. For now, the shares are at a relatively demanding valuation, particularly after yesterday's increase. Longer term, this is a company with a huge potential market. But at this price, hold.