February 28, 2014 / 7:56 AM / 4 years ago

UPDATE 3-Interserve buys Rentokil unit; sees earnings bump

* To buy Rentokil’s Initial Facilities unit for 250 mln stg

* CEO says purchase to raise earnings by double-digits in 2015

* Full-year profit rises 8 pct; outlook positive

* Interserve raises 74.8 mln stg in share placement

By Richa Naidu

Feb 28 (Reuters) - Building services and construction company Interserve Plc is buying a maintenance business from Rentokil Initial Plc for 250 million pounds ($417 million), in pursuit of double-digit growth in earnings next year.

The FTSE-250 company, whose services range from cleaning Sainsbury’s supermarkets to building shopping malls in the Middle East, said buying Initial Facilities adds maintenance contracts at JP Morgan, the London Underground, Debenhams and others to its business.

The deal will add double-digit percentage growth to earnings next year and a little less in 2014, probably mid-single digits, Interserve Chief Executive Adrian Ringrose told Reuters.

He said there was “definitely a more optimistic outlook” for 2014, based on the uptick in Britain’s construction sector at the end of last year.

Interserve shares jumped as much as 6.3 percent after the announcement of the deal and annual results showing an 8 percent rise in profit last year.

It raised 74.8 million pounds on Friday through a share placement to part fund the purchase, with the rest coming from a new bank facility. It placed about 12.9 million shares at 580 pence per share, a 3.5 percent premium to Thursday’s closing price.

The deal comes as Rentokil, whose services range from pest control to catering and security, nears the end of a major restructuring programme to focus on core businesses. It said proceeds from the sale would be used primarily to pay down debt.

Initial Facilities provides services including cleaning, catering, security, and mechanical and energy management.

The 8 percent rise in profit for the year to Dec. 31, 2013 was led by Interserve’s maintenance unit and an early recovery in the British property sector that offset weak international construction in the first half of last year.

Its London-listed shares traded as high as 610.5 pence on Friday. This was still far below the company’s intrinsic value of 1,077.2 pence, according to Thomson Reuters StarMine’s model of how much a stock should be worth when considering expected growth rates over the next 15 years.


Larger rival Kier Group has also expressed more confidence about 2014, after government data showed construction output in Britain rose modestly in the fourth quarter of 2013, spurred on by the highest numbers of new houses in more than five years.

Britain’s construction sector has benefited from a sharp pick-up in the housing market - although Interserve’s construction business is focused on commercial work.

“We aren’t exposed to house building - which is probably the most positive part of the market right now - but infrastructure and other forms of building, I think, are certainly through the worst,” Ringrose said.

Interserve’s UK construction business, which accounts for about a third of overall revenue, posted a nearly 9 percent rise in revenue to 802.2 million pounds.

Kier said on Thursday that it was optimistic about a recovery in the construction market after its building division posted an 18 percent rise in first-half revenue.

However, output is still 12.2 percent below its pre-crisis peak, a weaker state than in manufacturing or the services sector.

Revenue from support services jumped 13 percent to 1.3 billion pounds. The unit, Interserve’s largest, counts the BBC, Ministry of Defence and HM Revenue & Customs among its clients.

Headline pretax profit rose to 81.1 million pounds in 2013, compared with 75.3 million pounds a year earlier. Revenue rose 12 percent to 2.19 billion pounds.

Shares in the company were up 4.8 percent at 602 pence at 1430 GMT on Friday.

Interserve said JPMorgan Cazenove and Numis Securities were joint bookrunners for the placement and advisors for the deal.

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