Reckitt is under pressure from top shareholders to revisit a sale of its nutrition business, following litigation and a series of other setbacks at the division that have sent the company’s share price to decade lows.
The FTSE 100 consumer giant acquired the Mead Johnson infant formula business in 2017 for $17bn — its largest-ever acquisition — and it has been plagued by mishaps ever since. Meanwhile, the wider group, which makes Lysol detergent and Durex condoms, has underwhelmed investors as it struggles to build back sales volumes following a period of high inflation and suppressed consumer demand.
“Nutrition does not really have a strong strategic fit, and we’d be open to see that business find a new owner,” said Simon Jäger, a portfolio manager at Flossbach von Storch, which owns 4.2 per cent of the company and is its third-largest shareholder.
The nutrition business makes up about 15 per cent of Reckitt’s revenues and is a fraction of the size of its larger hygiene and health divisions. The conglomerate is due to report its half-year results on Wednesday.
“Reckitt has identified the nutrition business as one that doesn’t fit into their future,” said Ellen Lee, a portfolio manager at Los Angeles-based asset manager Causeway Capital Management, which is a top-10 shareholder. “It’s a unique consumer product that is not really similar to the rest of the products they sell.”
Analysts have estimated that the total liability from the infant formula litigation could be anywhere between £400mn and £8bn.
Reckitt already sold Mead Johnson’s Chinese unit for $2.2bn to local private equity group Primavera in 2021, and later tried unsuccessfully to offload the rest of the baby formula business for between $7bn and $10bn. In 2020 Reckitt announced a $5bn writedown on the acquisition, blaming falling birth rates and local competition in China.
In March a decision by a court in Illinois to award $60mn in damages to a mother whose child died after consuming a Mead Johnson formula wiped £5bn off the company’s market value.
Barclays analyst Iain Simpson estimated Mead Johnson’s value at £5bn without the discount a buyer might demand to account for in the litigation risk.
Reckitt has rejected the verdict and argued it has no scientific basis. “We are pursuing all options to have the verdict overturned and we believe the science is on our side,” the company said at the time.
Last year the US food and drugs regulator sent Reckitt and two other baby formula manufacturers warnings over their manufacturing safety standards. Just last week the company announced its formula sales would suffer after a tornado damaged one of its warehouses in Indiana.
Some investors have suggested that one option for Reckitt might be to ringfence Mead Johnson to protect the rest of the company until the litigation was concluded.
Lee at Causeway said a potential sale of nutrition represents a “trade off” for the company: selling the business now means “you give up some value but you get certainty. But maybe waiting 12-18 months is not that bad a thing.”
The company has also been targeted by activists. The Financial Times reported in May that Eminence Capital built a 0.5 per cent stake, and Bluebell Capital Partners has a smaller position.
Marco Taricco, co-founder of Bluebell, which has $120mn in assets under management, said the fund had urged Reckitt’s management to revisit plans to separate out the company’s hygiene and health divisions, a plan first introduced in 2018 by former chief executive Rakesh Kapoor.
“In such a way Reckitt would be in a better place to participate in the consumer health consolidation, as either a consolidator or target,” said Taricco.
Dealmaking in the fragmented consumer healthcare sector, which produces goods such as over-the-counter medicines, vitamins and skincare, has gathered pace since pharmaceutical companies GSK, Sanofi and Johnson & Johnson spun off their consumer divisions in order to streamline their business operations.
But the two top-10 shareholders dismissed Bluebell’s suggestion that the company should be broken up.
“We’re not in the business of trying to break Reckitt apart,” said Jäger at Flossbach von Storch. “We’re interested in how the CEO can run the existing business better through making operational improvements, not on changing the structure of the company.”
Lee at Causeway added: “We’re broadly not a fan of financial engineering. We don’t want the company to be so focused on short-term margin targets . . . to have sustainable top-line growth you need to invest into your brands.”
Reckitt said in a statement: “Last October CEO Kris Licht set out a strategy including three principles for portfolio value creation, in which every brand will need to earn its place in the Reckitt portfolio. We are committed to executing this strategy to maximise value for our shareholders.”
