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Rentokil seeks to stop the rot

www.breakingviews.com

UK business services conglomerate Rentokil Initial used to be the most reliable of companies. Under former chairman Sir Clive Thompson, it increased its earnings by 20% year on year for nearly two decades.

But now its reputation for quiet efficiency lies in tatters. Following a shock profit warning, Thompson has been kicked out and the business put under strategic review by new chairman Sir Brian McGowan.

What's the way forward? Two solutions have been widely touted. One is a management buy-out and another a break-up. Neither looks viable. But if the company can stabilize its falling margins, its high yield makes the stock look undervalued.

Rentokil's problems aren't really new. The company's operating profits peaked at £550 million ($990 million) in 1999. Since then, they have fallen by 20% and

margins have also declined. The shares have plummeted by more than 60% from their peak.

Part of the reason is that Thompson was more of a financial engineer than a business builder. His insight when he built Rentokil was that he could make lots of small acquisitions in the fragmented services sector at relatively low prices.

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