Rentokil: Ratcatcher poisoned by contract losses

Rentokil's facilities management arm is following the wrong growth strategy, say critics

Pest control group Rentokil Initial is facing fresh concerns over the future of its facilities business, adding to longstanding issues at its troubled parcel delivery arm.

Sources within its facilities management operation, which ranges from fixing office lifts to hotel laundry, have raised questions about its strategy of buying up smaller businesses and merging them within the Rentokil Initial brand.

One insider said a number of contracts are at risk, and cited the potential loss of residential and office contracts with the property agent Knight Frank and lucrative work with the law firm CMS Cameron McKenna. One of the Knight Frank contracts is already known to have been terminated.

This side of the business, known as Initial, will have to re-pitch to work for CMS – a contract which is said to be valued at around £3m – while a contract with the health group UK Specialist Hospitals was raised as one where "relationships are strained".

Last month, an HSBC analyst Matthew Lloyd raised Rentokil's facilities business as a concern alongside its loss-making parcels business, City Link, in a note to clients. He said: "Rentokil has persistent problems elsewhere in the business, which consensus implicitly glosses over … It still loses too many textile and washroom contracts and suffers bouts of pricing pressure in contrast to more stable peers."

Mr Lloyd added: "High contract losses have been, and remain, our core concern. Rentokil is losing about 15 per cent of its contracted revenue portfolio on a third-quarter 2012 annualised basis.

"Such a high level of contract churn is not consistent with a turnaround story. Improvement in contract churn would be the single most important driver to margin improvement."

Rentokil has been growing its facilities management arm through a series of acquisitions, and last year bought Modus FM from Modus Group for around £5m. But sources have questioned the viability of merging such different businesses, and warned that some clients have been unhappy with services since the takeover.

The group, which is best known for pest control and was even hired to trap rats at the Beijing Olympics, also bought Coventry-based Phoenix Fire Services last May.

City Link has long been its worst-performing unit, and Rentokil had planned to offload it. But a proposed management buyout has run into financing difficulties.

With the growth of online shopping, Rentokil's chief executive, Alan Brown, had hoped the City Link parcels delivery business would break even by this year. Last year, the £90m-turnover business had begun to improve, and the City expected management to get backing to take it off Rentokil's hands this year.

Rentokil is expected to maintain at its results in March that its facilities business continues to grow. It reported sales up 5 per cent for the third quarter. But insiders warned that in spite of its profitability cracks are beginning to appear.