Shares in Rentokil (RTO) rose more than 14% after renowned activist investor Nelson Peltz took a stake in the business.
Peltz's Trian Partners has bought a large share of the pest control business, and reports now suggest he will engage with Rentokil's leadership on "ideas and initiatives to improve shareholder value." The shares increased to £4.76 on Wednesday, which is still below Morningstar's fair value estimate.
Key Morningstar Metrics for Rentokil
• Fair Value Estimate: £6.20;
• Morningstar Rating: ★★★★★;
• Morningstar Economic Moat Rating: Wide;
• Morningstar Uncertainty Rating: Medium.
The news drove the business to be the number one riser in the FTSE 100 this morning as well as increasing its market capitalisation to just over £12 billion.
However, the London-listed business has struggled in recent years, with its expansion into the US falling flat on softer demand for its products.
Its North America business makes up about half of Rentokil's sales following a $6.7 billion (£5.3 billion) deal to buy Terminix, which Rentokil thought would boost its market share in the world's largest pest control market.
Russ Mould, investment director at AJ Bell, says Peltz is likely to facilitate a big shake-up at the business.
"[Rentokil] has struggled in comparison with its US peer Rollins, both in share price terms and financial performance," he says.
"Given Rentokil does have a large chunk of its business across the Atlantic this could include a push to shift its primary listing to the US."
Despite the daily jump in its share price, the stock is 26% lower than at the same point last year.
Is There Still Upside for Rentokil Stock?
Grant Slade, senior equity analyst at Morningstar, believes Peltz's investment in Rentokil underscores the extent to which investors have been overly pessimistic about its long-term growth prospects.
"We continue to see upside, with the stock still trading at a 25% discount to our unchanged
£6.20/$39.50 Fair Value Estimate. Peltz has held preliminary discussions with Rentokil, offering views on how the company could unlock latent shareholder value, according to media reports.
"This is unsurprising given Trian Partners' typical playbook, which involves taking concentrated ownership stakes and subsequently engaging with company management to offer operational and/or strategic expertise aimed at improving business performance," he says.
Although Slade believes Peltz's plans to drive shareholder returns is actually unclear, he continues to expect a progressive improvement in organic growth in both 2024 and 2025 – driven by the firm's North American pest control division, which is "showing early signs of promise."
Who is Nelson Peltz?
Nelson Peltz is a US billionaire, businessman, political donor, and hedge fund manager, who helped found New York alternative investment manager Trian Partners in 2005.
In recent years, he has garnered a reputation for spearheading agressive business transformations and mergers and acquisitions activity, a reputation he first built at Trian in 2007, when the company bought a 3% stake in Cadbury-Schweppes.
Since then, Trian Partners has been involved in dozens of other business deals, including, but not limited to State Street Global Advisors (STT), PepsiCo (PEP) and General Electric (GE).
This year he got into a proxy battle with Disney (DIS) that originally aimed to oust two board members: Maria Elena Lagomasino and Michael Froman.
Peltz claimed the company's share price had underperformed, its succession process had failed, and that billions in investments had been misdirected. However, Peltz ended up losing the battle, which resulted in the sale of his stake in the entertainment giant.
