Dial back to 2017. Then Reckitt Benckiser’s CEO Rakesh Kapoor spent $16.6n acquiring Mead Johnson, the infant nutrition company. Reckitt paid a 30% premium on the stock price.
At the time, the deal’s logic rested more on China than the US, Mead Johnson’s heartland. Reckitt was keen to diversify its portfolio and saw an opportunity as China’s one child policy was relaxed.
However the new CEO, Laxam Narashiman, appointed in 2019, was not on the same page. Competition, especially from locals had intensified and there were regulatory headwinds.
In 2021 Reckitt divested Mead Johnson’s China business to Primavera Capital for $2.2b. The deal included a manufacturing plant in the Netherlands.
Now the rest of the business is on the block. Reports say that the company hopes to get somewhere between $7-10b.
Another factor which has received less press attention, has been the threat from activist investors. Glaxo is divesting its OTC franchise (Haleon) and Unilever has sold off its tea following investor pressure.
Don’t shout too loud but Reckitt’s share price today is lower than 5 years ago.
The write down could be as high as $7b, provisions Reckitt has already taken. CEOs are paid to take big and bold decisions but this is a complete reversal of strategy. It also says something about the Board who presumably signed off on the original deal too. For consumer goods businesses, where building brands takes time, 5 years is a relatively short period.
It seems unlikely another manufacturer will bite. Abbott, Nestlé and Danone have substantial infant formula businesses presenting regulatory hurdles. Arla is perhaps an option though its capacity to handle such a huge acquisition is debatable, especially outside of Europe.
Instead it’s much more likely private equity will swallow Mead Johnson, PE will like the steady and predictable cash flow in particular; expect a hard bargain.