Interserve buys Rentokil unit; sees earnings bump

February 28, 2014

* To buy Rentokil’s Initial Facilities unit for 250 mln stg

* CEO says purchase to raise earnings by double-digits in2015

* Full-year profit rises 8 pct; outlook positive

* Interserve (LSE: IRV.Lnews) raises 74.8 mln stg in share placement

By Richa Naidu

Feb 28 (Reuters) – Building services and constructioncompany Interserve Plc is buying a maintenance businessfrom Rentokil Initial Plc (LSE: RTO.Lnews) for 250 million pounds ($417million), in pursuit of double-digit growth in earnings nextyear.

The FTSE-250 company, whose services range from cleaningSainsbury (Berlin: SUY1.BEnews) ‘s supermarkets to building shopping malls inthe Middle East, said buying Initial Facilities adds maintenancecontracts at JP Morgan (Other OTC: JPYYLnews) , the London Underground, Debenhams (Other OTC: DBHSYnews) andothers to its business.

The deal will add double-digit percentage growth to earningsnext year and a little less in 2014, probably mid-single digits,Interserve Chief Executive Adrian Ringrose told Reuters.

He said there was “definitely a more optimistic outlook” for2014, based on the uptick in Britain’s construction sector atthe end of last year.

Interserve shares jumped as much as 6.3 percent after theannouncement of the deal and annual results showing an 8 percentrise in profit last year.

It raised 74.8 million pounds on Friday through a shareplacement to part fund the purchase, with the rest coming from anew bank facility. It placed about 12.9 million shares at 580pence per share, a 3.5 percent premium to Thursday’s closingprice.

The deal comes as Rentokil, whose services range from pestcontrol to catering and security, nears the end of a majorrestructuring programme to focus on core businesses. It saidproceeds from the sale would be used primarily to pay down debt.

Initial Facilities provides services including cleaning,catering, security, and mechanical and energy management.

The 8 percent rise in profit for the year to Dec. 31, 2013was led by Interserve’s maintenance unit and an early recoveryin the British property sector that offset weak internationalconstruction in the first half of last year.

Its London-listed shares traded as high as 610.5 pence onFriday. This was still far below the company’s intrinsic valueof 1,077.2 pence, according to Thomson Reuters StarMine’s modelof how much a stock should be worth when considering expectedgrowth rates over the next 15 years.


Larger rival Kier Group (LSE: KIE.Lnews) has also expressed moreconfidence about 2014, after government data showed constructionoutput in Britain rose modestly in the fourth quarter of 2013,spurred on by the highest numbers of new houses in more thanfive years.

Britain’s construction sector has benefited from a sharppick-up in the housing market – although Interserve’sconstruction business is focused on commercial work.

“We aren’t exposed to house building – which is probably themost positive part of the market right now – but infrastructureand other forms of building, I think, are certainly through theworst,” Ringrose said.

Interserve’s UK construction business, which accounts forabout a third of overall revenue, posted a nearly 9 percent risein revenue to 802.2 million pounds.

Kier said on Thursday that it was optimistic about arecovery in the construction market after its building divisionposted an 18 percent rise in first-half revenue.

However, output is still 12.2 percent below its pre-crisispeak, a weaker state than in manufacturing or the servicessector.

Revenue from support services jumped 13 percent to 1.3billion pounds. The unit, Interserve’s largest, counts the BBC,Ministry of Defence and HM Revenue & Customs among its clients.

Headline pretax profit rose to 81.1 million pounds in 2013,compared with 75.3 million pounds a year earlier. Revenue rose12 percent to 2.19 billion pounds.

Shares in the company were up 4.8 percent at 602 pence at1430 GMT on Friday.

Interserve said JPMorgan Cazenove and Numis Securities werejoint bookrunners for the placement and advisors for the deal.

  • Director Dealings
  • Company Earnings
  • Interserve
  • Rentokil

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