Jeremy Warner's Outlook : Sir Gerry takes a tilt at Rentokil, but if he wants 10 per cent, he's six months too late

Risk of over-reaction in Vioxx case

Just to recap, Sir Gerry last month announced the formation of a bid vehicle, Raphoe Management, to invest in major turnaround situations. He'd found the experience of being non-executive chairman of Allied Domecq a dismal one, not withstanding the excellent price he eventually secured for the company from Pernod Ricard, and was just itching to return to the coalface of day-to-day management.

Hosting the reality TV show I'll Show Them Who's Boss must have gone to his head or something, for though Sir Gerry's reputation in the City has never been higher, he's not one for burning the midnight oil. As head of Granada he was sometimes described as the FTSE 100's laziest chief executive, always gone by five and only in extremis working on a Friday or at weekends. Managing Rentokil may require just a little bit more than that. With his fortune already secure, does he really relish such a grind?

The long hours are one thing; getting a foot in the door will be quite a challenge too.

The case for the prosecution is nonetheless an easy enough one to make. The Rentokil share price has been in decline for more than five years now, and the company's recent performance has been little short of calamitous. In response, non-executives under the leadership of the redoubtable Brian McGowan mounted a palace coup, ousting first the company's chairman and creator, Sir Clive Thompson, and then its chief executive, James Wilde.

Since then, things have gone from bad to worse, with one profits warning after another. What's more, Mr McGowan, who would much rather have been at his home in the American Rockies than chairing Rentokil, plainly struggled to find a replacement for Mr Wilde. It took him ages and when finally Doug Flynn was named as successor, the City was distinctly underwhelmed. This was the time to have pounced. Unfortunately, Sir Gerry was still at that stage up to his eyes with Allied.

Mr Flynn is a likeable, no-nonsense Aussie of considerable ability, but having earned his spurs in the media, first at Rupert Murdoch's News International, then as chief executive of the media buying agency Aegis, he is not obviously well qualified as Britain's rat catcher in chief. Sir Gerry, by contrast, made his fortune and reputation in contract catering, which bizarre though it might sound, is a quite a similar business to pest control and office services.

Both involve a high degree of logistical know-how combined with an ability to appreciate the difference between the dud and the bankable contract. Sir Gerry believes Mr McGowan's declared strategy of heavy investment in top line growth to be deeply flawed. In his experience, aggressive pursuit of new business leads to poor contracts and rapid margin erosion

None of this makes the task of persuading shareholders to back him any easier. Mr Flynn may be an unknown quantity, but he's yet to fail and, by the look of it, all Sir Gerry will be offering is a nil-premium takeover with 10 per cent dilution thrown in to pay for the magnificence of his management skills. Hugh Osmond offered something similar for Six Continents, but was sent away with a flea in his ear. Too greedy, said investors, and they were right. With management galvanised by the experience, both halves of the now demerged company have since stormed ahead.

Sir Gerry's pitch is that he can offer all the attributes of private equity - turnaround skills and a more highly geared capital structure - but within a publicly quoted structure, allowing existing shareholders rather than private equity to derive the benefits. That's what Mr Osmond said too. In the end, the company didn't need him.

Rentokil Initial's defences aren't as well prepared as Six Continent's were then. Half-year results announced on Thursday will show that the company has still to hit bottom. Yet Mr Flynn ought to be able to say enough that is positive to give reason for hope. If he can't, then Sir Gerry may be in with a chance after all.

Risk of over-reaction in Vioxx case

How bad might things get for the pharmaceuticals industry as it struggles to defend itself against a growing army of litigants? If the $253m (£141m) damages awarded to the widow of a 59-year-old man who took the painkiller Vioxx were extended to other claimants, Merck would facea potentially life threatening $50bn of liabilities. Yet the amount is likely to be considerably reduced on appeal and there would in any case be little point in litigants suing to the point where the company goes bust.

Even the tobacco companies have managed to avoid such an ignominious end. It would be a cruel irony if an industry committed to saving and improving the quality of life were to suffer a harsher fate than the purveyors of a product which is known to kill. The situation is nonetheless bad enough, both in terms of likely financial exposure for an industry already besieged by what one top pharma boss calls a "perfect storm" of difficulties, and the public relations damage inflicted.

Merck was generally thought to be on reasonably firm ground with this particular case, as the causal link between the condition that prompted the man's death and Vioxx was scientifically hard to prove. The outcome is therefore a double shock. Others facing multiple litigation, such as GlaxoSmithKline with the antidepressant Seroxat, will fear the worst. Some will shrink from contesting lawsuits altogether, preferring instead to settle out of court. That in turn could prompt a further mountain of frivolous litigation.

If it transpires that Merck deliberately misled regulators, doctors and patients, then it fully deserves anything that's coming to it, but few in the industry believe this to be at all likely. There are still lots of rotten corporations around, yet most companies, particularly in an industry as reliant on public trust as pharmaceuticals, aren't that stupid.

What instead tends to happen is that some products found in clinical trials to have an acceptable risk/benefit profile later turn out to have unforeseen side effects when introduced to wider usage. It is in the monitoring and disclosure of post-approval use that the failures have occurred. The same sort of problems, though on a much smaller scale of magnitude, have hit GSK's Seroxat, where the product's drawbacks for certain types of patient weren't appreciated until well after approval.

The debate then revolves around when physicians and patients should have been warned. No product can be entirely risk free. Many generally beneficial treatments will be either ineffective or positively harmful in some, witness aspirin, a miracle drug when discovered which some in the industry claim only half jokingly wouldn't have won approval in today's more risk-averse climate on account of its tendency to prompt life threatening stomach ulcers in some users.

In the Vioxx case, both the company and the system have been found wanting, but it is vitally important that in reacting to these shortcomings we don't throw the baby out with the bathwater. Awards of the type won last week are bound to make both the industry and its regulators even more risk averse.

It may also lead to a more confrontational relationship between safety regulators such as the US Food and Drug Administration and their charges, which in turn would further increase the cost and time spent bringing treatments to market. As things stand there is a high degree of co-operation. Worryingly, the wisdom of such an approach is being challenged.

j.warner@independent.co.uk

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