Rentokil Plunges on Profit Warning, Chairman to Go

Pest control to parcel delivery group Rentokil faced calls for a sale or break up, after a second profit warning in as many months sent its shares plunging over a quarter to 16-year lows on Thursday.

The British services conglomerate, best known for its rat-catching roots, said profits this year would fall well below 2007 levels due to weak trading and management failings at its City Link parcel delivery business.

"Credibility is clearly in tatters and the City Link debacle may herald the eventual break up of the group in our view," Investec analyst Robert Morton said in a research note.

Rentokil said Chairman Brian McGowan would leave by the group's annual shareholder meeting on May 14.

McGowan was involved in the controversial 2004 ousting of previous chairman Clive Thompson, one of Britain's best-known businessman who was dubbed "Mr 20 Percent" for his record of increasing earnings by this amount when chief executive.

Chief Executive Doug Flynn said he had appointed new City Link management and would not be "panicked" into a break up.

"We will continue to have an open mind about these issues. But I'm not sure that (a break up) is necessarily going to be the answer," he told reporters on a conference call.

But some analysts thought splitting up or selling the business was now likely.

"This morning's further profit warning probably signals the end of Rentokil as a conglomerate in our view," Panmure analyst Mike Murphy said. "The group is now ripe for a bid."

Rentokil, whose services also include cleaning, workwear and tropical plants, said adjusted profit before tax for 2007 rose 1.1 percent to 211.4 million pounds ($419.1 million), missing analysts' average forecast of 216 million pounds.

Flynn declined to forecast how much profits would fall this year, but said City Link had made 44 million pounds in 2007 and might not do better than break even this year. Other divisions were expected to increase profits this year.

Investec's Morton said he expected to slash his 2008 profit forecast to about 180 million pounds from 242 million.

Rentokil shares were down 24 percent at 79.8 pence, valuing the business at about 1.5 billion pounds. They traded as low as 75.1 pence, a level not seen since 1992.


Founded in the 1920s to sell a new rat poison, Rentokil has been battling stiff competition over the past few years and has sold its electronic security, guarding and conference units in a bid to focus on more profitable businesses.

It fended off an attempt by veteran troubleshooter Gerry Robinson to seize control of the company in 2005.

After several quarters of steady recovery, the group warned in December that weaker-than-expected consumer spending in the run-up to Christmas had hit business at City Link.

It said on Thursday, however, that the problems were more fundamental, and linked in part to management mistakes and problems integrating acquisitions.

As a result, Flynn said he had brought in Petar Cvetkovic, a former head of Target Express before it was bought by City Link, to lead a new management team, which would pause and review a depot integration plan and work to improve customer service.

Seymour Pierce analyst Kevin Lapwood said the 60 percent fall in City Link's fourth-quarter profit was "a disaster."

Rentokil froze its 2007 dividend at 7.38 pence a share and some analysts warned the payout could be cut in 2008.

The cost of insuring the firm's debt against default rose sharply. Its five-year credit default swaps were 50 basis points wider at 217.5 basis points, a trader said. That means its costs 217,500 euros a year to insure 10 million euros of the company's debt.

Net debt was 947 million pounds at Dec. 31 and Rentokil said it had enough money committed by its banks to deal with its foreseeable requirements, and to repay loans maturing this year in the event that capital markets remain tough.