City Link failing to deliver for Rentokil

Pest controller is held back as parcels arm has 'major issue with productivity'

The City Link parcel delivery business has become the albatross around the neck of Rentokil Initial– and even the Queen's pest controller is struggling to neutralise it.

"We've got two stories," said Alan Brown, Rentokil's chief executive, yesterday. "We're seeing increasing momentum in our pest, hygiene, textiles and facilities management businesses but there's a big but: City Link has continued to disappoint."

An average 4 per cent growth in revenues across the first four parts of Rentokil gave its board enough confidence to reinstate the dividend for 2012, with a final payout of 1.33p. However, pre-tax profit last year fell 4.1 per cent to £184.4m, almost entirely because of a slump at the parcels business. Rentokil yesterday wrote off £146m at City Link, on top off a £95m goodwill writedown last year.

"There's a major issue with productivity," Mr Brown said of City Link. "There's a gap of about 70p for every delivery we're making compared to that of the best in the business. That adds up to a lot of money on 50 million deliveries across Europe in a year."

He blamed the problem on the way Rentokil pays its subcontracted deliverers, who make up about 40 per cent of its total. "We've tended to pay them for time spent, rather than deliveries made. Now we're moving to paying for work done," he said.

Putting the slow progress down to "deep-seated management problems", he added: "It was difficult to sort out because there's not a lot of talent in this particular sector."

Mr Brown appointed a new boss and finance director of City Link from rival Parcelforce, and expects better results in the second half of this year. He dismissed talk of selling the division, saying: "We're quite committed to fixing it."

Rentokil's rat-catching business still hopes to return to doing business in Libya soon. The company spent the two years before 2011's revolution working on a major contract for Colonel Gaddafi to rid rats from the streets of Tripoli and Benghazi.

"We're having good discussions with the authorities there, and I hope we're able to progressively raise our presence in Libya again," said Mr Brown. "The rats had a field day when we were out of the country – there is an epidemic there that needs to be resolved. But we don't want to move in until we are sure we can get paid."

Rentokil is also planning on expanding throughout the Middle East, particularly Dubai, Abu Dhabi and Saudi Arabia, and Mr Brown said he hoped to do so via acquisitions.

Over the past three years when a dividend was not paid, Rentokil bought a string of businesses, including pest control companies National Britannia Turkey and Tetengo, a major bedbug killer in Mexico.

Shares in Rentokil plunged 6 per cent or 4.45p to 76p as analysts digested the latest setback in City Link's turnaround plan and slashed forecasts.

Investec cut its profits forecast for the group in the current financial year by £20m to £200m, and by £25m to £225m the year after.

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