Has the M&A Bubble Burst?

© ajijchan | iStock

While no one would ever wish for a global pandemic, in any crisis, there are always winners and losers. Throughout the past two years, the professional pest control industry was, well, a winner.

From the initial days of virtual panic in the spring of 2020, pest control was quickly classified as an essential service, offering clients a non-discretionary need. Hygiene and disinfection services presented themselves as new market opportunities, staff and customers came to grips with personal protective equipment requirements and we all learned new digital communication skills.

Globally, the pest control market has grown at a consistent compound annual growth rate of 4.7 percent over the last five years. In 2020 it was estimated to have reached $22.1 billion and is expected to continue on this upward trend. The recently published report by Specialty Consultants (see page 27) estimates the United States pest control market to have grown 8.2 percent during 2021, generating service revenue of $10.4 billion — nearly half the global total.

M&A GOOD, NOT EXCEPTIONAL. In the mergers and acquisitions (M&A) market, all activity initially stopped overnight, but by the end of 2020 there was a rush of activity in an attempt to catch up. More than $500 million worth of deals were finalized during the last 100 days of the year.

The prediction was that this level of activity would continue into 2021, with a forecasted global spend of more than $2 billion by the “Big Four” (Rentokil, Rollins, Terminix and Anticimex). Although the M&A market was active, it failed to reach those predicted heights. The table above (from M&A adviser The Potomac Co.) shows global spend reached $1,358 million. This was almost double the spend in 2020, but almost $500 million less than the record-breaking year of 2019.

In 2021, once again Rentokil was the most active acquirer, accounting for more than one-third of the global total spend. The firm purchased 48 pest control companies in 24 different countries with an M&A spend of $588 million. Of these acquisitions, 17 were in the U.S.

A fistful of regional U.S. companies were acquired, the largest being Florida-based Environmental Pest Service for $82 million. (EPS was ranked No. 15 on the May 2020 PCT Top 100.) Internationally, the company doubled its operations across the Middle East with the acquisition of Boecker, headquartered in Beirut, Lebanon.

Anticimex nearly doubled its global M&A spend from $247 million in 2020 to $450 million in 2021. The majority of this, about $400 million, was spent on regional U.S. companies. For example, Anticimex strengthened its presence in the Southeast by acquiring Pestban of Woodstock, Ga., and Clark’s Termite and Pest Control from Irmo, S.C. As a result, the company’s PCT Top 100 ranking has risen from the No. 8 spot in 2020 to No. 5 this year. The rest was spent on add-ons in existing countries in Europe, Asia and Australia, with the company’s first investment in Latin America through an acquisition in Colombia.

Originally planning to go for a stock market flotation in Sweden, Anticimex switched its private equity funder to EQT Future Fund in November 2021.

Soon to be knocked off its No. 1 spot in the PCT Top 100, assuming the Rentokil/Terminix acquisition closes, Rollins made 39 acquisitions during 2021 for a total of $146 million, a very similar figure to its 2020 spend.

Prior to the announcement of its own sale, Terminix spent $113 million on acquisitions during 2021.

Certus, the new arrival to the M&A market, spent $61 million on acquisitions during the year, and in the process acquired its 50th company. Private equity-funded, the company said its aim is to achieve a top 10 ranking within the PCT Top 100. Further progress was made during 2021, as its ranking went from 23rd on the 2021 list to the 18th spot this year.

HAS THE BUBBLE BURST? Total M&A spend may have not broken any records in 2021, but this is only half of the equation. For sellers, the question really is, “Will I get a good price?” Put another way, have acquirers had to pay more? The answer to both is “yes.” Pest control is an attractive, non-cyclical market that’s classified as an essential service. Consequently, the multiples of revenue, in other words the price paid to acquire a company, have risen.

“The bubble has yet to burst, but there is increasingly more danger on the horizon,” said The Potomac Co.’s Paul Giannamore. “Last August, I published a note that the stew of fiscal and monetary policy and industry dynamics made for the most competitive M&A market in the history of the industry. Most of those factors have rapidly abated. In Q4 of 2021, the public equity markets and the private M&A market in the pest control industry peaked. It is no longer a question of if, but when, and the when is fast approaching.”

But the M&A market’s robustness will continue for now. “PE firms are attracted to pest control for a variety of reasons,” said Certus CEO Mike Givlin, reflecting on the interest in this market by the private equity firms, who generally have a desire to enter the home services market. “Our industry provides strong cash flows, has been historically recession- resistant and has strong tailwinds, including increased urbanization, lower tolerance for pests and people seeing the value of hiring professionals to do the job right, the first time — to name a few.”

As far as what’s going on with the “Big Four” (soon to be the “Big Three”), Matt Whiting, vice president of corporate development with Rollins, said his company will continue to find opportunities to partner with leading companies and entrepreneurs.

“While we continue to watch for a potential slowdown in M&A activity, we do not see any signs of that in our current pipeline,” he said.

A small but growing part of the Rollins operation is its international pest portfolio. In 2020, the acquisition of Adams Pest Control solidified the firm’s presence in Australia. In recent years, a number of acquisitions have been made in the United Kingdom; however, the most significant is the acquisition of NBC Environment in April 2022. Now, Rollins is able to offer nationwide coverage.

Despite the ongoing closing process of Terminix, Rentokil said it still has money in its coffers for M&A activities.

“Our strategy for pest control M&A is predicated on continuing to target acquisitions in key markets to build density and targeting acquisitions in new countries and in mega and large cities where we have identified strong growth potential,” explained Rentokil CEO Andy Ransom, when presenting the firm’s 2021 results in early March. He indicated a pot of $335 million was available for 2022.

Staffan Pehrson, who was appointed president and CEO of Anticimex in March 2022, had similar feelings.

“We don’t anticipate any significant changes in the M&A market,” he said. “The market for acquisitions has been very consistent over the years, and we expect it to continue to be an important growth factor for Anticimex in the years to come.”

CLOUDS ON THE HORIZON? While pest control itself is an essential service, it still has its own set of challenges.

“Industry growth might have been even more robust were it not for the tight labor pool,” said Rich Kalik, Specialty Consultants partner. “Nearly 40 percent of the owners or managers surveyed (see page 27) said the inability to hire and retain a sufficient service technician staff inhibited their company’s growth this past year. About one-quarter of the respondents said the leading challenge to their business was finding and keeping good employees.”

Add to this the fact that the industry is faced with rising input costs, wages and inflation. Despite no desire to live with pests, residential customers will start to feel short of money, the commercial market will get more competitive and service companies will be forced to raise fees. COVID-19 still remains an uncertain force, and the war in Ukraine has led to political uncertainty.

“Rising costs, such as wages and fuel, are putting negative pressure on EBITDA, this could result in lower purchase prices, even if multiples remain where they are today,” said Givlin. “We are also seeing interest rates beginning to rise. This could potentially drive down purchase multiples as capital becomes more expensive. When you combine these two issues, it seems likely that we will see overall purchase prices come down. That being said, it’s impossible to predict where the market will go.”

On the other hand, Giannamore is less concerned about input costs and margins, and more concerned about monetary and fiscal policy.

“For the first time since the late 1980s, the Federal Reserve is telling us they will abandon supporting the equity markets, and instead focus on controlling inflation — which means forcing a recession and forcing down asset prices,” he said. “If the Fed is successful, and it’s a big if, nothing else will matter. Remember, this isn’t just about pest control. This is a bubble in sovereign bonds and global equities, and pest control is a tiny sliver. However, the air is coming out of this bubble one way or another. At first it will happen slowly — then all at once.”

Whiting tried to sum things up on a more positive note, pointing to one of the key attributes of the pest control industry. “Entrepreneurship,” he said, “is alive and well!”