Scepticism is festering among some market watchers about the merits of consumer giant Reckitt Benckiser 's (RB.) mooted $16.7bn (£13.5bn) takeover of infant formula business Mead Johnson.
The UK group is well-known for its acquisition prowess, but if the Mead Johnson deal goes ahead it will cost almost twice as much as all the other acquisitions, which include 2010's purchase of SSL (which brought it brands Durex and Scholl), it has ever made put together.
Analysts at RBC said the proposed acquisition would drag Reckitt's return on invested capital down into the low teens and that it was difficult to see how value could be created. The broker downgraded the stock to 'underperform'.
Analyst James Edwardes Jones said he was not convinced the deal met the three criteria that Reckitt chief Rakesh Kapoor set out in 2013 as parameters for a deal.
"And even if it does, it comes with a different level of risk than anything that the company has tried before," he said.
Mr Jones added that even if it was assumed profits would grow at 7.5 per cent a year with no growth in the capital employed, "it will take 10 years for the return on the acquisition to reach 8 per cent".
Jim Wood-Smith, head of research at Hawksmoor Investment Management, said Reckitt had become "rather dependent on acquired rather than organic growth".
He acknowledged that this was not necessarily a bad thing, but that the "larger you are, the more difficult it becomes to maintain".
Mr Wood-Smith said the rating of Reckitt's shares "brings us out in cold shivers". He added that Reckitt's six times book value price tag and price/earnings ratio of more than 20 times was a "full price" to pay for total sales growth of 3.6 per cent from 2012 through to 2015, "so an acquisition was needed".
Analysts at Berenberg moved Reckitt to a 'buy' rating just last month and remain optimistic about its prospects. They acknowledged that average earnings growth would be 13 per cent between 2016 and 2020, while cost savings of 10 per cent would be needed to push this up to 18 per cent.
Numis moved Reckitt to 'add' from 'hold' on the back of the deal, saying that the management team had "never been one to doubt". But the broker noted that Reckitt would arguably have a big job on its hands given sales at Mead Johnson fell 2 per cent in 2015, 3 per cent in 2016 and are due to fall 3 per cent on the same constant currency basis this year, too.
