Brain Food: Behind the spin

THE DILEMMA

by
Last Updated: 31 Aug 2010

Pest control to security services group Rentokil Initial hit the headlines in May when its chief architect and chairman Sir Clive Thompson was ousted in a boardroom coup led by non-exec Brian McGowan. Washing the ratcatcher's dirty linen in public showed how serious its problems had become as a result of chronic underinvestment and deep-seated cultural issues. Just two months after McGowan took the chair, CEO James Wilde resigned, and a trading statement issued in December unveiled profit-denting exceptional charges, though the firm reassured investors that profits for the full year would match the previously revised estimate of £350 million.

THE SPIN

McGowan denied the statement was a profits warning. 'It's clearly not a profits downgrade. It's exactly what I've been saying all along.' He went on to explain: 'What we are doing now is investing. Over the past three or four years there has been no growth in sales, and the main part of the strategy now is to grow the top line. But when you put costs in, you see a fall in profits.' He admitted: 'There's a little bit of "trust me, guv", but if you can't see improvement by the second half of 2005, you'll have to question the strategy.'

THE STRAIGHT TALK

Despite McGowan's reassurance, analysts cut their 2005 forecasts from about £360 million to £325 million. 'This is pretty grim reading,' one told the FT. 'The only division that appears to be doing well is parcels, and that is not a major part of the business.' Others felt the firm was moving in the right direction, despite McGowan's warning that things would get worse before they got better.

THE VERDICT

Shareholders will allow the reinvigorated Rentokil time to implement its new strategy, but patience is limited, despite proposed dividend increases of 10% for 2004 and '05. A replacement is needed for Wilde before a sense of drift sets in, though finding the right ratcatcher will be hard. Rentokil is willing to sell parts of its UK hygiene business, which would improve profits by £5 million a year, but not until 2006 and potentially at a price of £30 million because of disposal losses. The group is struggling with falling margins and loss of market share to more focused competitors, though McGowan says he has invested heavily in marketing and sales and is giving demotivated middle managers more say in the business. Can McGowan pull it off before shareholders demand the break-up of the group? He has just a few months before the trap snaps.

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