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Reckitt hopes Mead Johnson will provide the right formula

The deal to acquire the US infant formula business has come at an important time
February 13, 2017

The biggest acquisition ever made by Dettol maker Reckitt Benckiser (RB.) has been called "an inflection point" in its history by chief executive Rakesh Kapoor. The $16.6bn (£13.3bn) Mead Johnson deal will almost double its presence in consumer health and ramp up its exposure to emerging markets, particularly China.

IC TIP: Hold at 7253p

The company brought forward its results to accompany the announcement of the agreed purchase (subject to shareholder and regulatory approval) of the US-based infant formula business, the total cost of which will be nearly $18bn once Mead's debt is factored in. The deal essentially means Reckitt is entering a new category, but management claimed it was a "natural extension" to its consumer health portfolio, which was "already trusted by millions of mothers". Mead's sales fell in 2015 and 2016, but Reckitt said this was mostly due to ongoing regulatory changes in the infant formula milk market in China which will ultimately benefit the company.

Mr Kapoor rejected accusations that the purchase was buying in growth by saying it had a strong record of transforming brands' fortunes, and that Reckitt's organic growth remained solid. Almost two-thirds of Meads' sales are in China, the US and Mexico and the business is expected to push earnings per share growth up by a double-digit percentage by year three. Annual cost savings of £200m are also expected by the end of year three, but these will cost a one-off £450m.

Sales growth weakened through much of 2016 so the deal comes at an important time. Like-for-like sales rose 3 per cent to £9.89bn on a constant currency basis, but operating profit dropped 3 per cent on the same basis to £2.41bn due to £367m in exceptional charges, mostly (£300m) related to ongoing issues in South Korea with previously sold dehumidifier sanitisation products.

Emerging markets were key in 2016, with sales up 8 per cent compared to a more pedestrian 1 per cent in developed markets.

Analysts at RBC expect adjusted EPS of 340p a share for the year to December 2017 compared with 302p in FY2016.

RECKITT BENCKISER (RB.)
ORD PRICE:7,253pMARKET VALUE:£50.8bn
TOUCH:7,252-7,254p12-MONTH HIGH:7,786pLOW: 5,840p
DIVIDEND YIELD:2.1%PE RATIO:28
NET ASSET VALUE:1,203p*NET DEBT:17%

Year to 31 DecTurnover (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)
20129.572.41251134
20139.271.86195137
20148.842.13231139
20158.872.21244139
20169.892.39260153
% change+11+8+6+10

Ex-div: 13 Apr

Payment: 25 May

Includes intangible assets of £13.5bn or 1,922p a share