The worst acquisition by a major UK company in the last decade? It’s hard to think of a deal that beats Reckitt Benckiser’s $18bn purchase in 2017 of Mead Johnson Nutrition, a US-listed maker of baby milk formula. Shares in the Dettol-to-Durex group have never recovered from the shock. By way of add-on award, Rakesh Kapoor, Reckitt’s chief executive back in the day, can probably scoop the prize for most overpaid FTSE 100 boss of recent times: he departed two years after his fateful piece of deal-making having been paid the astonishing sum of £97.6m during his eight years in charge.
The latest example of Mead Johnson’s dreadful legacy was Friday’s news that a court in Illinois awarded $60m in damages to a woman whose premature baby died in intensive care after consuming the company’s Enfamil formula; the allegation was that Reckitt failed to warn adequately that feeding with infant formula increased the risk of necrotising enterocolitis (NEC). The verdict knocked 15%, equivalent to £5.4bn, off Reckitt’s stock market value as investors tried to guess what could follow from 400-odd similar NEC-related cases involving Mead and its US rival Abbott Laboratories.
Reckitt stands by the safety of its products and will appeal in Illinois, arguing the jury verdict was “not supported by the science or experts in the medical community”. Management spent Monday trying to reassure the City. But, as so often with US legal cases, outsiders take little for granted in the early stages. Barclays analysts think Reckitt’s appeal chances are “reasonable” and that £2bn of damages would be an “absolute worse case”. Over at Jefferies, they opted for imprecision and said the risk is anywhere between zero and £8bn-plus.
For the time being, then, Reckitt as an investment is a play on litigation risk. Management’s narrative about “rejuvenation” and higher profit margins from brands such as Cillit Bang and Finish has become the secondary story.
It would have been different without Mead Johnson. The 2017 deal looked overpriced at the time since Reckitt was paying about 29 times earnings, and it demonstrably became a waste of money when Kapoor’s successor announced a £5bn writedown on the carrying value only three years after purchase. That mostly related to the Chinese operation where Reckitt had to admit it overestimated birthrates and consumers’ loyalty to local brands; it sold the unit on cut-price terms a year later.
Kapoor’s mistake was to rip up Reckitt’s previous winning strategy of bolt-on purchases that could be slotted smoothly into the sales machine. Nurofen painkillers and Durex condoms arrived that way under old boss Bart Becht, who (aside from being paid megabucks himself) turned the old Reckitt & Colman into a sensational stock market performer after merger with Dutch firm Benckiser in 1999. As argued here at the time, the Mead deal looked like a bad case of a chief executive trying to buy growth at a moment when the revenue line was temporarily sticky.
On the day the takeover was announced, Reckitt’s share price was £71. Now it is £45.75, the lowest since 2013. Not all the woes can be pinned on Mead – margins elsewhere have also been a problem – but its distraction factor has been immense. The soon-to-be chair Sir Jeremy Darroch, a former BSkyB boss, will have to explain to frustrated investors why Reckitt deserves to exist in current form: the brands in both the hygiene and health divisions wouldn’t struggle to find buyers.
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Reckitt – who knows? – may yet escape its litigation battle with minimal or tolerable financial impact, which is how life seems to be turning out in the US for GlaxoSmithKline with its heartburn drug Zantac. But Monday’s modest 2% bounce in Reckitt’s shares reflects the new mood of heightened uncertainty. Neither moral of this tale counts as new. First, when previously successful companies engage in bet-the-farm acquisitions, shareholders should ask more questions. Second, don’t pay the chief executive £97m before his handiwork can be judged.