The credibility of Rentokil Initial’s management was on the line yesterday as the company blamed a dramatic slowdown in the economy for problems at its City Link parcels division.

The value of the rat-catching to washroom services group fell by £600 million as the company gave warning that slower consumer spending had hurt business at its express parcels delivery division.

Rentokil said that profits for the group were likely to be £10 million lower in the fourth quarter, compared with the same time last year. Despite the company’s insistence that all other parts of the business were performing well, investors reacted badly to the news, sending the shares down 22 per cent to 114.3p.

The change in fortunes at City Link is all the more dramatic because only a month ago, the company was reporting a 140 per cent surge in revenue.

City Link, it said last month, was performing strongly, buoyed by the acquisition of Target Express in late 2006 and robust business-to-business operations.

However, just four weeks later analysts were left questioning whether City Link was an early indicator of economic woes to come in 2008 or whether Rentokil’s management was merely making excuses.

“The anticipated surge in volumes seen in prior years in the B-to-C [business to consumer] segment in the run up to Christmas has been later and less than expected. B-to-C volumes have slipped below the level experienced this time last year, and business-to-business volumes, which had been significantly ahead, are now in line with last year’s levels,” the company said in a statement.

In a note on the profit downgrade, analysts at Cenkos Securities said: “The reality of the situation is that business-to-business growth has fallen from plus 9 per cent to flat in a very short period of time, but management is adamant this is a market issue and not a Rentokil issue, and business-to-consumer growth has fallen to around minus 7.5 per cent.”

The warning comes at a time when Doug Flynn, chief executive, finally looked as though he had got a grip on Rentokil’s disparate businesses.

Since he took over as chief executive two-and-a-half years ago, Mr Flynn has seen off an attempt to buy the company on the cheap by Sir Gerry Robinson, sold the conferences business, addressed the pension deficit, shut the UK textile business and sold three out of four manned guarding businesses. However, the shares have yet to recover the performance levels seen in the company’s heyday in the nineties, and question marks have been placed over the £210 million price tag Mr Flynn paid for Target Express. Yesterday’s profit downgrade did nothing to alter the company’s lingering reputation for slipping up.

Rentokil said that City Link was still winning new accounts, service levels were high and there were no issues over the integration of the Target Express business. “This is a really good business and is neck-and-neck now with DHL. We have not lost a single major customer,” a spokesman for Rentokil said. “For the last ten years there has been a preChristmas surge at City Link, but this year it just hasn’t come.”

City Link’s trade is 70 per cent business to business and 30 per cent business to consumer, but in the latter part it delivers lots of high-end electronic goods, high-value gifts and critical financial services mail.

Analysts moved to downgrade the shares. Kevin Lapwood, analyst at Sey-mour, reduced the group’s rating to a “hold”. Cazenove analysts also cut their 2007 earnings per share estimates for Rentokil by 2 per cent to 9.9p and pretax profit forecast to £215 million from £225 million.

The ups and downs of Rentokil

1983 A year after joining Rentokil’s board, Clive Thompson becomes chief executive of the group, promising impressive growth targets
1996 Throughout the mid1990s Mr Thompson triples the size of the business by buying a number of companies, the biggest being BET in 2006. He renames the company Rentokil Initial
1996 Mr Thompson is knighted for services to industry. His successes at Rentokil are the talk of the City, which has nicknamed him “Mr 20 per cent” for achieving 20% profit growth each year
Aug 1998 Rentokil fails to meet 20% target for the first time in 16 years, sending shares 9% lower
May 2004 Sir Clive ousted as the company issues a profits warning, in a mutiny led by five nonexecutive directors. He is replaced by deputy chairman Brian McGowan
Sept 2005 Sir Gerry Robinson sets out plans to revive the group, which include him taking on the chairman's post and a 2.5% stake in the company worth about £70 million. He warns that he will launch a £3 billion offer for the group if the proposals are rebuffed
Oct 2005 Sir Gerry rules out a takeover but says he will continue to hold talks with shareholders about becoming chairman
Dec 2007 The company announces a profit warning

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