Rentokil's Strategic Pivot: A Catalyst for Growth in Europe's Business Services Sector

The sale of Rentokil Initial's French Workwear unit to HIG Capital for €410 million marks a pivotal moment in the company's evolution. This transaction, which crystallizes €370 million in net proceeds, underscores Rentokil's deliberate shift toward high-margin, high-growth sectors like pest control and hygiene services—markets where it already commands 80% and 20% of its revenue, respectively. The move signals a broader strategy to reallocate capital toward asset-light, recurring-revenue streams, positioning Rentokil as a leader in Europe's consolidating business services sector. For investors, this is more than a divestiture; it's a roadmap for value creation—and a template for undervalued peers to follow.

Strategic Capital Reallocation: A Playbook for Growth
The Workwear sale is the latest step in Rentokil's multiyear effort to prune non-core assets and focus on its two pillars: pest control (a market expected to grow at 5-7% annually through 2030) and hygiene services (bolstered by post-pandemic demand for workplace safety). By exiting the French workwear business—a sector with cyclical demand and capital-intensive operations—Rentokil eliminates a drag on margins while freeing up capital for acquisitions that amplify its core businesses. CEO Andy Ransom's emphasis on “high-growth markets” is no empty slogan: the pest control division alone generates ~20% EBITDA margins, far exceeding the 12% margins of the divested workwear unit.

The capital raised will likely fuel bolt-on acquisitions in hygiene and pest control, where fragmented markets offer ripe consolidation opportunities. Consider that Europe's hygiene services sector is 30% more fragmented than the U.S. market, with many small players unable to scale. Rentokil's balance sheet—strengthened by this sale—positions it to acquire these targets, further entrenching its dominance.

Valuation: Overpriced Today, Justified Tomorrow?
Rentokil's current valuation metrics are rich by historical and sector standards. Its P/E of 31.3x (as of Q2 2025) is 79% above the European business services sector's 16.2x average, and its EV/EBITDA of 13.2x exceeds the sector's 11.0x median. Critics might argue this reflects overvaluation, but the strategic pivot offers a compelling rebuttal:

• Growth Premium: Analysts project Rentokil's earnings will grow at 12.66% annually, justifying its PEG ratio of 2.3x. While high, this aligns with peers like Serco (which trades at 42.7x P/E but 32.4% growth).
• Margin Expansion: Shifting toward higher-margin pest control and hygiene services could lift EBITDA margins by 2-3 percentage points over the next three years.
• Dividend Sustainability: While the payout ratio of 5,625% of net income (a data quirk likely due to one-time gains) raises eyebrows, the core business generates ample free cash flow to sustain the dividend.

The disconnect between Rentokil's premium valuation and its fundamentals may narrow if growth materializes. A DCF model estimates fair value at £3.01, versus a current share price of £3.54—a 17% overvaluation. However, analysts' 19.8% upside target to £4.24 suggests the market is pricing in execution risks. The key inflection point: near-term M&A activity.

Sector Consolidation: Undervalued Peers Poised for Transformation
Rentokil's move highlights a broader opportunity in Europe's business services sector: companies with non-core assets and the capital to reallocate. Two peers stand out as underappreciated candidates:

1. MTO Mitie Group (MTO):
2. Valuation: P/E of 15.8x vs. Rentokil's 31.3x.

3. Opportunity: Mitie's facilities management division generates stable cash flows but faces headwinds from price-sensitive clients. Its £1.9 billion market cap leaves room to acquire niche hygiene or pest control firms. A strategic sale of its lower-margin construction services (15% of revenue) could free capital for high-growth plays.

4. Renewi (RWI):

5. Valuation: EV/EBITDA of 11.9x (vs. Rentokil's 13.2x).
6. Opportunity: While primarily a waste management firm, Renewi's hygiene division (handling medical waste) is underpenetrated. A shift toward service-led hygiene solutions could mirror Rentokil's strategy, unlocking higher margins.

Both companies trade at discounts to Rentokil but lack its execution track record. Investors should prioritize those with management teams willing to divest non-core assets and reinvest in high-margin segments.

Risks to Consider
- Dividend Sustainability: Rentokil's payout ratio anomaly aside, its core business generates robust cash flow. Still, any misstep in integrating acquisitions could strain margins.
- Regulatory Risks: Europe's tightening labor and environmental regulations could pressure costs for service providers.

Conclusion: Act Now Before the Playbook is Fully Priced In
Rentokil's sale of its French Workwear unit isn't just a tactical move—it's a strategic masterclass in capital reallocation. By focusing on high-margin, recurring-revenue sectors, it's positioning itself to outpace a sector where growth is unevenly distributed. While its valuation is rich, the potential for margin expansion and M&A-fueled earnings growth justifies the premium.

For investors, the broader lesson is clear: look for European business services firms with underutilized capital and non-core assets to shed. Mitie and Renewi are early candidates, but others will follow Rentokil's lead. The sector is consolidating, and those who act now—before multiples fully reflect the shift—will reap the rewards.

The time to invest is now. The playbook is written; execution is the only variable left.