Globalization of the Pest Control Industry

With 19,500 of the global pest control industry’s 40,000 operators doing business in the United States, international pest control companies are setting their sights on North America and getting involved in the action through mergers and acquisitions. Kemp Anderson, who has more than 20 years of experience facilitating mergers and acquisitions for leading pest control companies, saw the shift to North America begin about 10 years ago.

“I believe that we started to see a major shift in values in North America right around 2005,” said Anderson, president of Kemp Anderson Consulting. “There was an event that happened (in 2006), and that was Rentokil purchasing J.C. Ehrlich.” Rentokil actually entered the U.S. market in 1974 and had a modest presence prior to the J.C. Ehrlich acquisition. With the acquisition of Ehrlich, then the fourth-largest pest management company in the U.S., Rentokil had a platform company for North America expansion and began rapidly acquiring companies in the U.S., Canada, Mexico and Central America.

Rentokil’s acquisition of Ehrlich was for an estimated $141 million for a company that had $124 million in revenue. This comes out to be $1.14 on the dollar, or an estimated seven times EBITDA. “That’s when you really started to hear valuations start to creep up,” said Anderson.

Over the next 10 years, valuations skyrocketed, like in 2015 when Rentokil acquired the Steritech Group, paying an estimated $425 million for $150 million in revenue. At $2.83 on the dollar and approximately 17 times EBITDA, Anderson said this was definitely a strategic purchase of a very big company.

“This is when the acquirer is willing to throw out all valuation models, and instead consider the strategic benefits of owning the target company,” he said.

And the strategic moves are clearly working for the rapidly growing company. Since 2007, Rentokil North America has reported a 14.4 percent compounded annual growth rate versus the industry average of 4.9 percent. Based on its 2015 revenue, Rentokil North America reports $440 million and sits at number three in the PCT Top 100. All operations in 66 countries are company owned. “When you consider the acquired revenue from the Steritech transaction, Rentokil is potentially poised to report more than $660 million in North America for 2016, Anderson said. “Clearly, most of that is due to mergers and acquisitions by Rentokil as they developed their global strategy or expanded their global strategy and really attacked North America,” said Anderson. “And you have to hand it to them, they’re number three in the U.S. now in the top 100. In 10 years they’ve climbed to revenue of almost $450 million through mergers and acquisitions.”

Rentokil isn’t the only company with an aggressive growth strategy consisting of mergers and acquisitions in our own backyard. Rollins subsidiary Orkin is currently the number two global pest control company and number one in the U.S., with revenue estimated at $1.4 billion (31 of 34 of their global markets are franchised).

Terminix is right behind Orkin as the number three global pest control company and number two in the U.S. with estimated revenue of $1.4 billion. Twenty-one of their 23 global markets are franchised.

Anticimex rounds out the group as the number four global pest control company and got an introduction to the PCT Top 100 with the purchase of Bug Doctor in New Jersey last year. The company currently operates in 17 countries, employs 4,000 people and had total revenues in 2015 amounting to approximately $450 million.

“With Rentokil, Rollins, Terminix and now Anticimex coming into North America, we see heavy activity driving multiplies and values in North America in particular,” said Anderson. “It becomes hard to look at these numbers and say, ‘Is this the new norm?’ It’s probably not, but it is the reality today.”

But opportunities to achieve numbers like these are what’s driving international companies to North American shores.

“Since the cost of capital is very low, it is easier for buyers to make deals and to be more aggressive, driving valuations up.” — Kemp anderson

“Why is all of this activity happening in North America? There are some interesting things going on when you look at the worldwide pest control market,” said Anderson. “Almost exactly 50 percent of it is in North America. You have about $15 billion in the global industry with about $7.7 billion of it produced in North America.”

What is even more influential than having half of the world pest control business in the United States, is that 40 percent of that industry is located in four states — New York, Florida, Texas and California. Said Anderson, “Think of it this way: 20 percent of the world’s pest control is in these four states. These numbers force global players to the U.S.” But not all of the leading companies are completely focused on mergers and acquisitions in the U.S.

Anderson said that while Rentokil is actively acquiring in North America, Orkin is actively acquiring in Europe, the U.K. and Australia. Orkin recently acquired Safeguard Pest Control and Environmental Services in the U.K. and Statewide All Pest and Murray in Australia.

Also differing from Rentokil, Terminix and Anticimex, is Truly Nolen and Truly Nolen International. “They’ve had an international strategy without mergers and acquisitions,” said Anderson.

Although they’ve been relatively quiet on the mergers and acquisitions front in recent years, they boast 78 corporate locations, 33 domestic franchises and 208 international locations in 68 countries. In the U.S, Truly Nolen generates more than $100 million in annual revenues, but combined revenue from North America, international and domestic franchises is estimated at $200 million.

“Everyone is making moves in North America, you have so much of the global pest control industry in the states,” he said. “This is a market that the global players cannot ignore and I believe that this will continue to drive multiples and values for several years to come.”

So what does this mean for sellers? According to Anderson, these types of global mergers and acquisitions are definitely impacting the values of the businesses operating in the U.S. “You see Orkin, Terminix, Rentokil and Anticimex all trying to make moves in North America, this all influences value for sellers,” said Anderson. “If you’re thinking about selling your business, clearly having the ability to go to global buyers is important.”

And since the cost of capital is very low, it is easier for buyers to make deals and to be more aggressive, driving valuations up — as long as the expected return on the capital is higher than the cost of the capital. Interest is an added deal expense for borrowers potentially influencing the price, but interest rates are at historic lows, so borrowing the capital has a minimal impact.

“Since interest rates are so low, buyers that buy with borrowed funds are feeling more secure about paying big purchase prices,” said Anderson.

Potential buyers may even have the resources to buy without borrowing. “Many pest control buyers are armed with strong balance sheets that are loaded with cash,” he said. “The more cash potential buyers have on hand, the less need there is to borrow to complete a deal. Most large healthy pest control companies have cash, but may borrow to stretch on a large acquisition.”

And sellers can see the benefits of that stretch by opening their doors to multiple international buyers.

The author is a Cleveland-based writer.