Stock Market News: Beyond Meat, Rentokil, and More

Rentokil (RTO -0.53%) plans to buy rival Terminix Global in a $6.7 billion deal that prompts different reactions from investors. Motley Fool analyst Asit Sharma analyzes that story and more and discusses the impending breakup of GE. 

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This video was recorded on Dec. 14, 2021.

Chris Hill: It's Tuesday, December 14th. Welcome to Market Foolery. I'm Chris Hill and before I welcome in a familiar voice, I want to share a little bit of news and that is producer Dan Boyd and I are moving. Later this month will be the last episode in this podcast feed because, to borrow from the great LeBron James, we're taking our talents to The Motley Fool Money feed. Starting in January, we're going to be turning Motley Fool Money into a daily show. Whether you started listening to this show in the past month, the past year, or you've been one of the dozens since we started this show in 2011, I really think you're going to like what's coming in January. 

If we're not already following Motley Fool Money on whatever podcast platform you use, please do that because that is where you're going to be hearing from me and the other people that you're used to hearing on this show, starting in January. We want you to weigh in, we want to get your thoughts on the topics that you enjoy hearing about. We have a short four-question survey that we have put in the episode description, you can just click that link, it shouldn't take more than one minute to fill out. We do want to hear from you, so thank you for doing that. More details to come, but I am really excited for the next phase of Motley Fool podcasting. With that, let me welcome Asit Sharma. Thanks for being here.

Asit Sharma: Thank you for having me as always, Chris.

Chris Hill: We're going to dip into the Fool Mailbag. We've got two very different business types to discuss and we're going to start with Beyond Meat (BYND -0.84%) because shares are up more than seven percent this morning. The maker of plant-based meat substitutes got an analyst upgrade based on the potential for Beyond Meat's national launch with McDonald's (MCD 0.37%) possibly happening in the next few months. When I read this, I immediately thought of our colleague Emily Flippen because we talked about Beyond Meat briefly on the most recent episode of Motley Fool Money. In that case, it was the fact that Taco Bell had essentially rejected, they were going to have a little bit of a partnership with Taco Bell, Taco Bell essentially rejected the product that Beyond Meat had sent. We made the obvious joke that, "Boy, when Taco Bell is rejecting you on quality, that's really saying something." Emily immediately lead with, "Hey, look, they've got partnerships with McDonald's and some other big national outfits." This seems like for people who are bullish on Beyond Meat, this is the type of deal they want to see happen sooner rather than later.

Asit Sharma: I agree, Chris, if you're a Beyond Meat shareholder, this is good news. If you're the first mover in an industry and you bringing new technology to the market, whether we're talking software or here we have alternative meat or plant-based meat, it takes a lot of partnerships to get your brand accepted, it takes years of development, so much investment. In this case, you've got a business which has trouble making money, they have to spend on several fronts in new distribution, in the experimentation with new items, they build manufacturing capacity in Asia, a lot of new people to have to hire on. 

Beyond Meat is in this long-term game of extending its brand while it's going to lose money. When you see something like this that McDonald's is going to move forward potentially in about 3-5 months with the McPlant and that the tests are going well as far as the analysts who recommend the stock this morning has been able to note with channel checks, I think you have that beginning of long-term traction coming. But it's always one step forward, one step back in this industry, it's an asset industry. We should stress here that the partnership with Taco Bell, both parties say is still strong, but you have these setbacks. I think for Beyond Meat, the trick is really going to be to capitalize on this brand and to penetrate even further into the grocery aisles, that's where over the long term, they'll make most of their money. But this is positive, brand is everything, and when you were present in the drive-thru with McDonald's, it's a huge boost.

Chris Hill: What is the potential you think for? I know, in general, we don't want to go into investments when we buy a stock, we don't want to go in with the mindset of, "I really hope this company gets acquired." But it seems to me is that Beyond Meat, and you can throw Impossible Foods in there as well, there is a greater than zero percent chance that someone comes along and says, "We like what you are doing, we think you're going to do better inside of our ecosystem," and makes them an offer. What would you say the chances are that in three years, this is still a stand-alone public company?

Asit Sharma: I actually think, in this case, the chances are fairly high that they'll be here as a stand-alone company after several years. They play in a really specialized space in this market. They developed their own take on alternative meat, it depends on pea protein isolates. It's not something that readily lent itself just to plugging in and moving up in terms of scale, if you are an industrial produce. So we've got the big agro giants who might be want to consider taking this company over, but they already have their plant set up in place. I think for them, it's more about just the marketing of it to take what they've got in-house, repackage it, make it look good, and then spread it through their distribution footprint. I don't think they are just quite as interested in this little novel technique that Beyond Meat is using. For that, I don't see a lot of other big consumer packaged companies that might be interested. Just because of their own tech which is specialized, I feel like they're going to be around. Of course, and I'll look tomorrow, there'll be an announcement. I'm going to be proven wrong but at least for today, they will be a stand-alone company.

Chris Hill: I said we're going to talk about two very different types of businesses. Now that we've talked about plant-based meat substitutes, let's talk about pest control. Terminix Global, which is a pest control company based in Tennessee, is being acquired by a British rival Rentokil. It is a cash and stock deal worth 6.7 billion and shares of Terminix are up 20 percent, shares of Rentokil down 11 percent, which immediately makes me think that investors don't like what Rentokil is paying. They may like the deal, in principle, they don't like the price.

Asit Sharma: Before I comment on investors' reaction, Chris, I want to take a moment here to celebrate our friends across the pond and I'm not talking about Rentokil specifically, but I'm talking about our friends, the British, who are so great at coming up with really cool brand names based on Latin cognates. For those of you who watch All Creatures Great and Small, it's a PBS show, or have read the wonderful novels by James Herriot, you probably are familiar with the scene in which James Herriot, this young veterinarian, in turn of the century, 20th-century England, finds himself out late at night and has to stop at what is essentially an early form of a truck stop. He sides up to the counter and there are all these really huge rustic farmers and truckers sitting around. To look macho, he orders a Bovril, which is still around today. 

This takes the Latin term for cow bovine and makes it into this manly beef tea. I love the way the British built their brands around the system. In that same timeframe, Rentokil was developed as a pesticide brand. It was originally called Entokil for insect, Latin for insect. But there was a trademark dispute, so the company became Rentokil. Anyway, kudos to the British for this. Now, as for the reaction in the stock prices, Rentokil has been a serial acquirer of other companies for decades. They usually do this without much regard for how the market is going to react. I think this is pretty much par for the course as far as Rentokil's management is concerned. This is a company that does specialize in the UK, in Europe, Asia, everywhere in pest control services. But they also play in the hygiene space, so they provide soaps, hand sanitizers, they rent all kinds of uniforms. We see some companies that are very similar here in the US like UniFirst. 

For them, this is their typical acquisition to extend a footprint in a core business. This company trades at a total enterprise value to EBITDA, that is, earnings before interest, taxes, depreciation, and amortization of almost 19 times. But in Terminix, based in the US, of course, they're getting a company which trades at a slightly lower multiple. I believe it trades around 14 times when you take its total enterprise value versus its EBITDA, so it's a little bit of a bargain there. Terminix, I should note, also is a brand name formed from a Latin root term terminate, etc. We have two really fun brand names here that will merge together. I think this is a good acquisition for the British company. It's a slow-growth industry, Chris. Terminix has, I think, organic growth rate of something like four percent. You just don't soar in your year-over-year revenue when you're selling pest control services. On the other hand, they've modernized the way they go about it. They do use I think a wider range of technology. Some of that is more friendly for those who don't like the idea of harsh chemicals. They use a lot of tech to market. 

Now, there's services. To me, this isn't a bad acquisition for Rentokil. I understand why Terminix shareholders are happy. I think, over time, this is accretive for the British company and we will turn out to be just another great acquisition fast forward past today to the next 3-5 years.

Chris Hill: Yeah. I think if you're a Terminix shareholder, you have to be happy with this deal because Rollins, which is a company we talk about from time to time, the parent company of Orkin is one of their rivals here in the United States and Rollins is just flat out a better stock, a better business. It's roughly twice the size of Terminix and the stock has outperformed Terminix. I think if you're a Terminix global shareholder, you're hoping that the immediate reaction with Rentokil stock is not so bad that they rethink the price that they are paying because I think you want this deal to go through.

Asit Sharma: Yeah, absolutely. I feel like the deal will go through. Rentokil tends to use a little bit more leverage in their operations. There will be some synergies there to realize. All in all, just changes a landscape that it doesn't see much transformation. I mean, there's glacial change in this industry, but fun deal to contemplate and really interesting acquisition in a time where maybe as we're in this post-COVID environment, Terminix is a little cheaper than it might have been. Again, think smart on Rentokil's part, and we will see in a year or so how this deal looks in retrospect.

Chris Hill: Got an email from Wayne Weinman in Seattle who writes, "I have stock in GE right now. What happens to that stock in the breakup of GE when they split up the company in a few years? Does it stay at GE, does it convert to some new companies? Or has GE not said yet? The answer will determine if I cash in and put the money elsewhere or stay the course." Thank you for that, Wayne. There are a couple of ways we can go here. I mean obviously, this is a question about General Electric, but it's a question for anyone who is dealing with either the breakup of the company or the spin-off of a company. We talked last week about Intel getting ready to spin-off Mobileye in 2022. That's something that Intel shareholders will have to deal with. In terms of GE proper, I believe the split up is happening over a multiyear period, isn't it?

Asit Sharma: Yeah, that's correct, Chris. This is going to happen over essentially two years. Next year, we will see the spin out of the healthcare business. It's going to be, I think, early in 2023. We shouldn't say next year we're still in 2021 by a few days. [laughs] But let's say early 2023. That will be a tax-free spin-off as these deals usually are. If you hold GE shares now in early 2023, you'll get shares of the new company, which itself will be publicly traded. I believe GE is going to retain roughly a 20 percent interest in that company. Then in 2024, GE will spin out its renewable energy business and current shareholders will get shares of that new company. Shareholders will then be left with what's going to be an aviation-focused company. 

The original GE which was umpteen conglomerated business divisions just a few years ago is going to become a company that just focused on one industry. At the end of a long story of market dominance in the US. Not to get off on a tangent here, but to answer Wayne's question, he's trying to make a decision. Hey, do I hold shares? Do I sell these? Academic studies actually show that a parent company and you have to take this with a grain of salt, but by and large when parent company's spin-off smaller divisions that are faster growing, often the effect of something you wouldn't expect. The parent company does a little better in its share price than it might have otherwise. If you look over long periods of time, say a 5-7-10 year time horizon. That's for the reason that management of the parent company can focus on the true core business of the company. What happens to those spun-out companies? They tend to perform pretty well in most cases because you have a dedicated management team that focuses on what might and in many cases to have been ignored stepchild. Now, this is not true in GE's case. They had many stumbles among various divisions over the years, but I see something like this perhaps playing out. I think shares in all three companies have the potential to do well. They will be very competitive in these three big markets. Not to give any personalized investment advice because we can't, Chris, but I think the average shareholder at GE should look to see what kind of potential there is in holding shares of three competitive companies in three growing industries and then make a decision.

Chris Hill: I mean, the reason I own shares of PayPal is because I was, and still am, an eBay shareholder. That spin-out has worked wonderfully for me and wonderfully for anyone else who is in the same situation. I'm not saying that's going to be the case with the various divisions that GE spins out. This is something I think we talked about at the time of the news and it's worth revisiting. It really does seem like it would be an overstatement to say to use the phrase like the depth of conglomerates. But I think it is accurate to say that conglomerates have lost their shine over the last 20 years. There is a less of a case for businesses like GE. My hunches will see fewer of them in the future.

Asit Sharma: I tend to agree, Chris. I think when technology changed at a slower rate, there was a lot to love about the biggest conglomerates because they were so dependable. They turned out really great cash flow. Could always rely on one or two divisions to step up in any given quarter if some were lagging. It seemed like a great recipe for long-term success for investors, but the rate of change is so fierce now in technology. It's difficult to stay on top of one industry. Just try now to stay dominant or close to dominant in three to four or five or seven or eight industries. Nearly impossible. That business structure makes less sense as time goes on. But the pendulum always swings back. There will be a time who knows when it will be maybe a few decades from now, where we will see something like this arise again. Maybe it will be tech conglomerates. I have no idea. Ideas go out of fashion and then conditions change and we take another look at businesses that have fallen out of favor. Maybe this model comes back, but for now, yeah, I think it's really hard to pull off these days.

Chris Hill: Asit Sharma, always great talking to you. Thanks for being here.

Asit Sharma: Thanks so much, Chris.

Chris Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of Market Foolery, the show's mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. Thanks for checking out that survey link in the episode description. See you tomorrow.