What are the challenges for Reckitt’s sell-off strategy?

Reckitt Benckiser started the week with its share price crashing to lows not seen in more than a decade as markets opened in London on Monday, underlining the scale of the challenges it faces with its restructuring plan.

Days earlier, CEO Kris Licht had unveiled his strategy to sell off a portfolio of low-growth homecare brands, strip away unnecessary management layers and assess all strategic options for the troubled nutrition unit. But like the tornado that disrupted Reckitt’s business in Indiana earlier in July, a new court ruling on Friday against competitor Abbott Laboratories in the US over the health impacts of its premature infant formulas blew the multinational’s plan off course.

The $495m awarded against Abbott followed the $60m damages awarded to a mother who said her baby died after consuming Enfamil baby formula in an earlier case against Reckitt in March. Reckitt is fighting the decision but remains open to further litigation, which analysts at Barclays estimate could cost the group £500m to £2bn to settle.

So, with all the uncertainty and upheaval, how is the strategy likely to play out?

Selling off out-of-vogue ex-growth portfolios to streamline operations and focus on ‘power brands’ is nothing new, with Unilever, Nestlé, Danone, General Mills and Hain Celestial all engaging in the strategy.

“Global groups in the home and personal care sector are constantly recycling their portfolios, buying innovative, fast-growth, margin-enhancing brands in ascendency and releasing those holding back profitable growth,” notes Tim Leach, Houlihan Lokey global consumer MD.

Bruno Monteyne of Bernstein says the reshuffling of portfolios reflects the maturity of today’s industry. “The core skills of all these companies are creating dreams and quickly building global scale,” he says. “They are great at marketing, improving operations, being efficient and globalising supply chains to gain competitive advantages. They are not good at managing low growth or zero growth businesses.”

Licht, who took the reins in October 2023, reckons his strategy will reshape Reckitt into “a world class” consumer health and hygiene company with one of the strongest growth and margin profiles in the industry.

Reckitt has not fully outlined all the brands to be moved into the new non-core Essential Home division, but Cillit Bang, Air Wick and Calgon were all confirmed as surplus to requirements, while Lysol, Dettol, Harpic, Finish and Vanish will join the likes of Durex, Strepsils, Gaviscon, Nurofen and Veet in the ranks of cherished power brands.

Leach reckons there’ll be a number of potential buyers lined up for the portfolio, which accounted for £1.9bn of Reckitt’s £14.6bn revenues in 2023, including emerging international investment firms such as Bolton and Spectrum, and cleaning behemoths such as PurposeBuilt Brands.

“On the other hand, global majors might be more interested in specific brands that could enhance their existing portfolios,” he adds.

Monteyne says selling the lower-growth brands is the easy part. “The question is whether it makes you a better, more successful business.”

Nutrition options

If selling Essential Home will be straightforward, dealing with the nutrition division – which has been a thorn in Reckitt’s side since the disastrous $17bn acquisition of Mead Johnson in 2017 – will be anything but.

A return of the Mead Johnson name for the nutrition operation signals a clear separation of the unit under the new plan.

Iain Simpson of Barclays says that given a sale or IPO is “challenging” in the near term, the most attractive option will be a spin out and relisting on the stock exchange in New York.

“This does not rely on Reckitt finding external buyers or investors,” he notes. “Relisting would allow Reckitt to explicitly firewall litigation risk from the wider group, and last week’s resurrection of the Mead Johnson name under which this business was listed prior to its 2017 acquisition by Reckitt could potentially facilitate this.”

Investors and analysts greeted the Reckitt strategy update with cautious optimism but it’s far from certain a successful execution will rebuild the decimated market cap of a slimmed-down group. Shares bombed by 9% to 4,093p on Monday as markets reacted to the Abbott litigation in the US and its negative read for Reckitt.

AJ Bell investment analyst Dan Coatsworth believes Reckitt could become a takeover target once the restructuring is complete and the legal action surrounding the safety of the baby formula is put to bed. “A more streamlined Reckitt would certainly look appealing to rivals, particularly if the share price stays at bargain basement levels,” he says. “The stock recently traded on its lowest multiple of forward earnings since 2012. Trading in the region of 13x earnings, this is roughly half its peak rating seen in 2020. It’s rare for a consumer brand powerhouse to trade so cheaply and it’s almost certain trade buyers or private equity have the stock on their radar.”