It’s not often investors shrug off a £2.5bn loss, but Reckitt Benckiser shareholders were so relieved by its exit from the troublesome Chinese baby milk business that its share price barely wobbled on the news this week.

The FTSE 100 consumer health giant announced over the weekend that it had struck a deal to sell its infant child nutrition business in China to private equity firm Primavera for $2.2bn.

The group will continue to own the Mead Johnson and Enfa brands, selling a royalty-free permanent licence to use them in China, and will keep an 8% stake in the unit. The deal will generate cash proceeds of around $1.3bn, but also will incur tax costs of around £300m and other transaction costs of approximately £200m. In total it expects to generate a £2.5bn net loss on the deal, taking into account the revaluation of its assets and writedowns on the book value of the business.

It marks a sorry reversal of its strategy to branch out into higher-margin consumer health products when it spent £13bn on acquiring Mead Johnson under former CEO Rakesh Kapoor.

The troubled unit failed to meet growth expectations amid declining birth rates in China and increased domestic competition, while the advent of coronavirus further damaged trading and led to a review of the business in February. Reckitt had already written down £5bn of its value in 2020, reflecting the unit’s struggles.

Reckitt’s wider baby formula division reported a 7.4% drop in first quarter sales in 2021 and another £2bn will be cut off its value.

The company will use the proceeds to pay down debt, but it is also part of a wider pivot to refocus on areas of growth – including growing its other consumer health brands in China.

Hargreaves Lansdown commented: “Reckitt is steaming ahead with efforts to streamline the business, and the sale will allow it to focus even more heavily on its health and hygiene businesses… Getting debt under control, and a renewed focus on core products means this deal should, on balance, be seen as a net benefit.”

Jefferies suggested the deal was also broadly positive, commenting: “Reckitt will be as good as free of what has become the millstone around their neck of China baby, at a gross valuation modestly ahead of what has been reported in the media.” However, the broker noted that one-off costs of £500m, consuming 40% of the gross proceeds, might be a negative surprise to the market.

Reckitt shares have fallen by about 20% since the summer of last year, as its struggles with infant formula have weighed down booming sales of its cleaning and health products. The shares edged down 0.7% to 6,440p on Monday, but were back at 6,473p by Thursday, just 0.2% down from its closing price before the news broke.

Topics