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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
There are two ways for a company to think about which assets it should own. One is to look at what businesses belong together because there are similarities in the way they buy, make and sell stuff. Another is to look at what businesses, taken together, deliver the sort of earnings growth and cash flows that keep shareholders happy.
Reckitt’s restructuring plan falls somewhere in between. In a world in which consumer conglomerates are falling out of favour, it suffers from a steeper discount than most — made worse by litigation risk on Mead Johnson, the infant nutrition unit acquired in a disastrous 2017 deal which shareholders had wanted sold.
With the arrival of new chair Jeremy Darroch, Reckitt has taken the eminently sensible step of putting the baby formula division, plus low-growth home care products including Cillit Bang and Airwick Air Fresheners, on the block. Taken together, these accounted for about 30 per cent of Reckitt’s £14.6bn of sales last year.
Yet the group has shied away from pursuing an all-out break up. It will keep its “power brands” — across health, hygiene and home — together, in a higher-growth, higher-margin business with £10.3bn of revenues. The hope, it seems, is that the combination of disposal proceeds, plus a higher rating for Reckitt’s new, sleeker and faster-growing mini-conglomerate, will unlock enough value to avoid shareholders pushing for more radical changes.
On paper, that makes some sense. A back-of-the-envelope calculation suggests there is plenty to play for. Core Reckitt — made up of the likes of Nurofen, Durex, Dettol and Finish — made something like £2.8bn of ebitda in 2023, thinks Iain Simpson from Barclays. Put that on a multiple of 15 times — a 12 per cent discount to Procter & Gamble — and it could be worth about £40bn, equivalent to the whole of Reckitt’s enterprise value today. Add in £10bn for the two businesses that Reckitt is looking to shed, and subtract net debt, for a 30 per cent-plus potential uplift in the stock.
But spreadsheets are easy to populate and restructurings are harder to do. The lower-growth homecare business might be attractive to a private equity buyer but a sale of infant nutrition will be complicated by legal liabilities. The added risk, as always, is that the excitement of corporate action distracts managers from the day-to-day running of the business.
Reckitt’s promised plans at least give shareholders the hope of upside to come. But the company’s operational performance has also left something to be desired. If this refresh or its power brands falter, it will face renewed calls for a more radical overhaul.
