Reckitt Benckiser is bidding for baby milk giant Mead Johnson. Will it pay too high a price? Ben Judge reports.
Reckitt Benckiser, the maker of household goods including Cillit Bang, Durex and Nurofen, has offered $16.7bn (£13.3bn) to buy Mead Johnson, the US-based maker of baby milk. Reckitt has offered $90 a share, a premium of almost 30% over Mead's share price before the news broke. The deal would be financed with cash and the issuance of new debt by Reckitt, which would mark "the end to a more-than-decade-long focus on retaining low leverage", says Nina Trentmann in The Wall Street Journal.
Buying Mead Johnson would be "a major departure from Reckitt's old diet of small purchases", says Nils Pratley in The Guardian. And while investors are "inclined to smile on any proposed big acquisition", it does seem a very "un-Reckitt-like" deal. Reckitt is paying about 29 times earnings, which would be fine if Mead were growing fast, but the firm's sales fell last year. It almost smacks of desperation. Reckitt's chief executive, Rakesh Kapoor, "has been warming up his investors for a big move for a while", but the assumption was that he was aiming for "an unloved consumer healthcare division of a big pharmaceutical firm". Mead isn't that, yet Reckitt is "happy to push its own borrowing ratios to the maximum" to buy it. "It all suggests Kapoor failed to find what he really wants to buy and has settled for second-best."
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Shareholders should certainly be questioning "if they're getting much Cillit Bang for their buck", agrees Jim Armitage in the Evening Standard. Much of Mead's US income is reliant on government programmes for low-income families. President Donald Trump is "not keen on welfare" and any substantial changes could hurt this business. Overseas markets aren't safe from the "Donald Trump effect", either. China is Mead's big international market but "what happens if the president embarks on a trade war"? Even if that doesn't happen, growth has been disappointing lately. "Reckitt investors should think hard before agreeing this deal. They could end up sucking on a dummy."
The price is definitely steep, agrees the Financial Times' Lex column. Still, buying Mead looks a "good strategic move" with "no major antitrust implications". And note that Reckitt is offering to pay cash, rather than paying in its own shares, which themselves are highly valued. "It thinks it can run the business better, and wants that upside for its own shareholders." That may be fair enough. Mead is a "drifting business". Reckitt is more efficient and can turn its considerable marketing expertise to infant milk. "Provided Chinese babies take to formula that Reckitt may hype like dishwasher tablets shareholders should feel nourished."
-
SIPP holders to get cash warnings and be offered default fundsNews Providers will be required to offer investors a default fund and must warn customers of the inflationary risk of cash savings the regulator has said. What the new rules mean for your retirement pot?
-
Zoopla: Asking price discounts hit a five-year high – is now the time to buy a property?
News Zoopla’s October House Price Index shows sellers are accepting discounts of 5.5% on average to secure a sale – we reveal where homeowners are taking the biggest asking price cuts
-
Reckitt shares are undervalued
Tips Reckitt shares have struggled in recent years, but the consumer-goods giant is now getting its act together.
-
Investors should take a closer look at Reckitt as an inflation hedge
Analysis Consumers are sticking with Reckitt Benckiser despite it passing on higher costs, and the company is expecting further growth. Rupert Hargreaves looks at the latest figures.
-
Reckitt Benckiser’s clean-up
Features The consumer-goods sector is no longer the cash cow it once was. Reckitt’s revamp will help it buy some growth. Alice Gråhns reports.
-
Retreat from risk: buy stocks with moats
Features A moat represents a castle’s first line of defence against intruders. An ‘economic moat’ does the same thing for a company – and it’s a critical feature to look for before you invest in any stock, says Phil Oakley.
-
My favourite stock in the Big Pharma sector
Features Ed Bowsher explains what’s going on in the pharmaceuticals industry, and picks his favourite stock in the sector.
