Consumer goods giant Reckitt Benckiser (RKT) has finally thrown in the towel on its Chinese infant formula and child nutrition business, announcing that it is selling the unit to private equity investors.
The deal, which values the business at $2.2 billion, includes manufacturing plants in China and the Netherlands and a royalty-free, perpetual licence to use the Mead Johnson and Enfa brands in China.
Reckitt will keep an 8% stake in the unit and will continue to own the Mead Johnson and Enfa brands worldwide outside China. While investors will have welcomed the deal, news of more write-offs was less welcome. The shares dropped 0.2% to £64.73.
STRATEGIC BLUNDER
Net cash proceeds from the sale are expected to be $1.3 billion, which means the firm will take a write-off of £2.5 billion for the ‘re-measurement of goodwill and intangible assets’.
This is on top of a previous £5 billion goodwill charge linked to the 2017 acquisition of Mead Johnson, which was meant to grow the group’s baby formula sales in China but which proved to be a disaster.
New chief executive Laxman Narasimham tried to pass off the sale as just ‘another step in our strategy to rejuvenate growth and create long-term value’, but the firm will be mighty relieved to have offloaded what has turned out to be a poor business.
‘Reckitt will be eager to put this episode in its rear-view mirror and focus on addressing another thorn in its side, namely slow growth’, said Russ Mould, investment director at AJ Bell.
‘It has well-known brands but that doesn’t guarantee sales. Consumers want a bargain, and they can get very similar products from supermarkets’ own-label brands at a cheaper price than Reckitt’s goods’, added Mould.
MORE FOCUSED
The sale of the infant nutrition business doesn’t mark the end of Reckitt’s involvement in China as it remains an important market for key products like Dettol, Finish and Durex.
However, removing this distraction means management can now focus on promoting its ‘power brands’ and developing its online offering worldwide.
‘Strong sales of its healthcare products during Covid were a welcome shot in the arm, but the business cannot be complacent as it seems highly likely that health and hygiene sales in the coming years won’t match those of 2020’, argues Mould.
‘That suggests Reckitt will have to spend heavily on marketing to keep its brands front of mind when consumers go shopping. The business will also have to be better at product innovation’.
