Rentokil Initial faces sale of Cannon UK business to appease watchdog

Pest control and hygiene giant Rentokil Initial could be forced to sell off the UK arm of recent acquisition Cannon Hygiene after the competition watchdog raised concerns.

The Competition and Markets Authority (CMA) said provisional findings of its investigation showed the takeover could lead to higher prices and lower quality for some customers.

Rentokil and Cannon are two of the top three washroom suppliers in the UK.

The news came as the FTSE 100 company said it was on track to meet expectations after a string of acquisitions boosted revenue.

The group bought 16 businesses in the third quarter, continuing an aggressive acquisition streak.

The CMA has suggested remedies to its concerns including a sale of Cannon’s UK business.

Analysts said the proposal would have little effect on the company’s bottom line, but that it raised concerns about another deal with services firm Mitie to take over its pest control arm.

Last week, the CMA issued an initial enforcement order concerning the Mitie merger.

Analysts at Jefferies said: “Cannon UK is £15 million of revenue and £1 million of profits, thus we believe this decision will have a negligible impact on consensus estimates.

“That being said, we believe this could provide a negative read-across regarding sentiment and uncertainty regarding Rentokil’s recent acquisition of Mitie Pest Control.”

The CMA is now inviting comments on its provisional findings until early November. A final decision must be made by December.

The Cannon acquisition has already helped to boost growth in Rentokil’s hygiene division, which showed a 22% uplift in revenue during the third quarter with just 2.8% accounted for by organic growth.

Revenue in the period jumped 8.2% to £651.1 million.

Ongoing revenue, a measure used by the group to assess its current operations by excluding the impact of closed or disposed units, jumped 11.8%.

This was partly down to 7.7% growth as a result of acquisitions, but organic growth was also strong at 4.1%.

Adjusting for the impact of Hurricane Irma on Puerto Rico operations in September 2017, organic growth was 4.4%.

Chief executive Andy Ransom said: “I am pleased with the performance of the group in the third quarter.

“We continue to successfully deploy our market-leading innovations and digital applications to our customers and to execute our value-creating M&A programme, and we remain on track to meet expectations for the full year.”