With an activist investor on board, is the Rentokil Initial share price set to bounce back?

With an activist investor on board, is the Rentokil Initial share price set to bounce back?

Passive and Active: text from letters of the wooden alphabet on a green chalk board

Image source: Getty Images

News that Nelson Peltz has been building a stake in Rentokil Initial (LSE:RTO) has caused the share price to jump 13%. But the stock is still 28% lower than it was a year ago. 

If Trian Partners – Peltz’s firm – can find ways to unlock significant shareholder value, the share price could have further to rise. So should investors look to buy the stock now?

Activist investing

Ordinary investors like me buy shares in companies because they like they way they’re run. With activist investing, it’s the opposite. 

Activists make investments in businesses they think could be run better and then try to make management listen. Sometimes it works, sometimes it doesn’t. 

Most recently, Nelson Peltz showed up at Disney with a list of proposals. These included reducing losses from the streaming division and working out who the next CEO might be.

Trian’s bid to win a seat on the board failed, but shareholders – including Peltz – did pretty well. The stock went from around $88 to $120 during the activist’s time as an investor.

What’s wrong with Rentokil?

The latest news is that Trian has turned its attention to Rentokil. Things hadn’t been going well with the stock, so what does Peltz want the company to do?

It’s not yet clear. But one idea might be for the company to join the seemingly unending parade of businesses delisting from the London Stock Exchange and moving to New York.

The idea isn’t crazy – shares listed in New York trade at much higher price-to-earnings (P/E) multiples than their UK counterparts. And Rentokil does most of its business in the US.

When Indivior announced that it was considering this idea back in February, its stock jumped 26%. So could something similar be on the cards for Rentokil?

Should I buy?

The latest news is annoying for me – I said in an article last week that I thought Rentokil shares looked attractive near their 52-week lows. A 13% jump makes things a lot less clear.

With a view to buying the stock, I don’t want the share price higher. And I don’t think there’s much wrong with the underlying business. 

The company has carved out a dominant position in a growing industry. It’s working on bringing down its debt after a big acquisition, but things are moving in the right direction.

Activist involvement brings a new risk to the equation, though. If Peltz fails to make an impact – for whatever reason – the stock could go back to where it was.

Active vs passive investing

Trian’s involvement in Rentokil changes the investment picture. Investors need to consider how likely it is that Peltz will bring about change and what the outcome will be either way. 

That’s a much more complicated equation. And a higher share price makes it more difficult to view the stock as a buying opportunity right now.

All of that means I need to have another think about whether or not to buy Rentokil shares. But at least I’m in good company with my view that it was a bargain before.

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