Rentokil Downgraded by Morgan Stanley on Intensifying US Pest Control Competition

Morgan Stanley has downgraded pest control giant Rentokil Initial to “equal-weight” from “overweight”, citing intensifying competition and lower peer valuations in the U.S. market. The investment bank also slashed its price target on the company by 16% to 420 pence from a previous 500 pence.

Private Equity Disrupts US Market

The primary driver for the downgrade is the rapid expansion of private equity-backed operators in the United States, according to the Morgan Stanley note. These firms have significantly increased their market presence, challenging the dominance of established players like Rentokil and its main rival, Rollins.

Key points highlighted by the brokerage include:

• Private equity firms now represent over 16% of revenue among the top 100 U.S. pest control companies, a sharp increase from just 1% a decade ago.
• The growth of these PE-backed platforms is outpacing listed operators, eroding the crucial route-density advantage traditionally held by industry leaders.
• This trend has inflated acquisition costs, with PE buyers accounting for over half of U.S. pest control deals in the past three years. Average deal valuations have climbed to 2.5 to 3.5 times enterprise value to sales, up from 1 to 2 times between 2005 and 2015.

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In response to this environment, Rentokil has reportedly reduced its 2026 acquisition spending guidance from approximately $200 million to about $120 million, limiting a key avenue for its growth.

Digital Headwinds and Company Outlook

Morgan Stanley also flagged a potential threat from evolving online search behaviors. A test conducted by the bank across 25 U.S. markets found that large language models recommended independent operators in 79% of top-three search results, compared to just 7% for Rentokil and 8% for Rollins. This could hinder Rentokil's digital lead generation and customer acquisition efforts.

Rentokil's shares have declined more than 30% since June, and Morgan Stanley sees limited potential for a near-term re-rating. The bank pointed to expectations for a weak third-quarter trading update, scheduled for Oct. 22, and a potentially lengthy turnaround under new CEO Mike Duffy. The note also observed that Rentokil's adjusted EBITA margin of 15.5% in fiscal 2025 trailed the 22.4% reported by Rollins.