Shares of pest control giant Terminix Global Holdings (TMX) shot higher out of the gate on Dec. 14, rising by as much as 30.5% at one point in early trading. That gain is likely to hold firm, too, because the big news is that Terminix is being acquired. Here's a quick look at the deal.
Before trading opened for the day, Terminix announced that it had agreed to be bought by British competitor Rentokil Initial (RTOKY 1.86%). The deal is valued at $6.7 billion and will be a mix of cash (20%) and stock (80%). Current Terminix shareholders can pick all cash or all stock, but the actual amount of either received will be prorated based on demand. The merger is expected to close in the second half of 2022 and still needs to get all of the normal approvals, including from shareholders and regulators. After the deal is complete, current Terminix shareholders will own 26% of the combined company, with Rentokil shareholders owning the remainder.
Terminix announced that the offer represents a 47% premium over where its stock traded on Dec. 13, the last trading day prior to the news release. However, the stock has only gone up by around 30.5% this morning, resulting in a fairly wide discount to the company's premium estimate. There are a couple of complicating factors. For example, Rentokil Initial is listed in the United Kingdom (the shares are traded over the counter in the United States). U.S. investors getting shares in a foreign stock may not be a welcome event. It is possible that U.S. investors have started to dump their shares on the news looking to cash out before getting stuck with a hard-to-trade stock.
Then there's the fact that these two sizable industry competitors are joining forces to become an even larger industry competitor. Regulators have been more cynical about mergers lately, so the risk that the deal gets scuttled or that the companies need to make changes to it is not immaterial. Also, as you might expect, Rentokil's stock has fallen on the news, so the value of the 80% stock component is smaller now than it was a day ago.
This deal is a complex one for Terminix shareholders because of the British buyer. If you want cash and not stock in the deal, you'll likely find yourself on a long list and end up with stock anyway. That stock could be difficult for you to trade, given that buyer Rentokil Initial is listed in the U.K. And then there's the problem with getting the needed approvals. Conservative investors might want to sell and lock in the gains, accepting that some money may be left on the table.