Deal focus: Jade Invest rides pest control M&A boom

Anticimex is the roll-up that everyone wants to follow. EQT bought the pest control business in 2012 and went to complete more than 200 add-on acquisitions, expanding the footprint from five countries in Northern Europe to 18 globally. Last June, EQT’s position was taken out by a consortium comprising its own long-dated impact fund, GIC, and other investors for EUR 6bn (USD 6.9bn).

In recent years, the global pest control market – with an emphasis on preventative action rather than post-infestation extermination – has seen a flurry of M&A. Rentokil’s USD 6.7bn acquisition of Terminix Global Holdings shares top billing with Anticimex, but there have been dozens of smaller deals as actual and aspiring market leaders buy their way into competencies and geographies.

As a mainstay of Asia’s 21% share of an industry worth USD 22bn worldwide in 2020, China is a prime target. Even EQT is getting in the action, as demonstrated by its recent acquisition of a majority stake in Guardian Hygiene Service, at an enterprise value of around USD 100m. Jade Invest, owner of Guardian since 2018, made a full exit with a 3.3x multiple and a 40% IRR.

“The same opportunities in the global pest control industry also exist in China. We see an opportunity for Guardian to lead the movement in China towards pesticide-free and environmentally friendly solutions while increasing operational efficiency,” said Jerry He, EQT’s head of China.

“Also, with a highly fragmented market, there’s an opportunity to scale the business quickly through a systematic acquisition strategy.”

Buy and build

Guardian already completed part of this journey under Jade, completing 12 add-ons and growing into a national leader. There were three main drivers: footprint expansion and the pursuit of scale; service density, which involves leveraging short distances between locations to reduce costs and improve margins; and service line expansion, for example, buying a forestry pest control specialist.

Ludvig Nilsson, founder of Jade, notes that bolt-on acquisitions are reasonably straightforward in pest control and consolidation is a well-recognised strategy, not least because of Anticimex. They also bring down the overall cost of investment. Jade bought Guardian at a 2x price-to-revenue multiple, but it picked up the 12 smaller businesses at multiples of 1.3x to 1.6x.

The success of Guardian is regarded internally at Jade as validation of the firm’s decision to switch from a fund-of-funds model to direct investment with an emphasis on lower mid-market buyouts. M&A is a core part of the value creation approach. There have been five deals to date and Guardian is the second exit, following the sale of lifestyle goods retailer Latt Liv to JD.com.

“We look to put USD 30-60m to work on day one and then build on that. It means we can acquire companies that are too small for the big guys – many wouldn’t do a USD 30-40m deal even if they felt they could put in more capital later. We help these companies grow strategically and then try to sell them to mid-cap private equity or to listed Chinese companies or multinationals,” Nilsson said.

“For the strongest companies, we can also seek an A-share listing, even if that lengthens the holding period considerably.”

Jade subsequently acquired a second pest control business, Marsbro Science & Technology, and there was no shortage of interest in both companies. In 2019, the likes of Anticimex, Rentokil, and Terminix were all pushing into Asia through greenfield expansion and M&A. Terminix focused on China and made inquiries about numerous businesses, including Guardian.

It ended up buying minority stakes in eight local pest control players with options to assume control within a couple of years. However, then came a strategy shift at corporate level, China was no longer considered core, and local management at Terminix approached private equity firms about backing a spinout. Trustar Capital has secured that deal, according to a source close to the situation.

Preventative approach

The environmental solutions plus digitally-enabled operational improvement approach advocated by EQT is also visible in Jade’s work with Guardian. For example, low-toxicity chemicals replaced pesticides and sensor-based rodent traps and remote monitoring systems were introduced.

“The whole industry is moving towards IoT [the internet of things],” said Nilsson. “A factory has traps around its perimeter fence and service engineers must carry out regular inspections to stop infestations. With IoT systems, the service provider and factory are alerted when a rat enters a trap, which means there’s no need for weekly checks. This means higher service quality and lower labour cost.”

This points to a broader shift in the pest control industry to subscription-based preventative services rather than responding to infestations when they happen. Companies bring in third-party experts to evaluate potential risks, implement protections, and take responsibility for ongoing prevention.

These services are increasingly required to meet certification standards in areas like pharmaceuticals and food production. They are also regarded as a form of brand insurance. In 2017, around the time Jade was conducting due diligence on Guardian, local media reported on a rat infestation at a restaurant run by hotpot chain Haidilao, prompting a social media frenzy.

“They had been pitched continuously by Guardian and others about implementing preventative pest control, but always declined. Following this scandal, all their restaurants were closed for a few days and a preventative system was implemented,” said Nilsson. “The reputational risk and cost of someone filming a rat in your kitchen is very high.”

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• Topics
• Greater China
• Support services
• Trade sale
• Buyouts
• China
• EQT Partners
• Jade Alternative Investment Advisors