Stock in focus

Reckitt Benckiser

Theo Wyld, Research Analyst


52 week high-low£81.08 - £63.24

Net yield2.51%

Hist / pros per21.7 - 19.6

Equity market cap£45,232

Reckitt Benckiser (Reckitts) is a branded products group specialising in household, health and personal care, and selling into nearly 200 countries. You may recognise their brands such as Durex, Gaviscon, Dettol, and Finish, to name a few. The last 18 months has been plagued by a number of mishaps, some attributable to dumb luck but others down to mismanagement.

First, came a resurgence in the press relating to the sale of humidifier sterilizers that reportedly were linked to deadly lung injuries in South Korea. This occurred in 2011, but Reckitts has come under fire again as claimants get closer to settlement. They have set aside £300m which covered their first two tranches of claims, plus their forecast for tranche three. For a claim to be successful the Korean government has to decide whether or not it is valid. The probability of a claim being verified has dropped significantly from tranche to tranche, but we have seen how easy it is for these types of issues to drag on past forecast deadlines – just look at the PPI issues in this country.

It has not been all bad news, however. Reckitts recently completed the acquisition of infant nutrition giant Mead Johnson.

Next, came the disappointment of branded pedicure product Scholl. They had a highly successful model which they decided to upgrade. Where they fell down was by not testing the more expensive model in a few markets on a small scale before launching globally. The upgrade has ended up flopping which has contributed to the declining trend in like-for-like sales over the past year or so. We are assured they have learned from this and in addition we should begin to lap the poor performance which will help like-for-likes going forward.

To add insult to injury they were slapped with a misrepresentation fine in Australia and New Zealand. The trouble stemmed from packaging which was found to not make clear that seemingly specific formulations of pain relief (i.e. period pain relief) did in fact work for other forms. Reckitts were forced to take their medicine here.

It has not been all bad news, however. Reckitts recently completed the acquisition of infant nutrition giant Mead Johnson (MJ). Management have been interested in getting into infant nutrition for a few years now. They see this as a long-term 3-5% growth category, driven by population growth, increasing education around infant nutrition, and premiumisation in the developing markets.

Mead Johnson had been in their sights in particular, but until recently they could not justify the rating to make a bid. So, what was it that caused the de-rating of MJ and presented Reckitts with their opportunity to pounce?

There is a system whereby you can bid to be the brand that hospitals recommend to parents on a statewide basis.

Essentially, it was poor management. They missed several important trends that were occurring in their main market, China (c.30% of revenues). These included channel shift, premiumisation, and the distaste for a Western product that outsources any part of its manufacturing/supply to Chinese third parties. They were also too aggressive on milk pricing relative to peers, and therefore lost considerable share.

In the US (c.28% of revenue), infant nutrition is essentially a duopoly between Abbott and MJ. There is a system whereby you can bid to be the brand that hospitals recommend to parents on a state-wide basis. This is extremely valuable as parents tend to be particularly brand loyal when it comes to their new-borns. MJ had made the decision to pull back on spend in this area and as such they lost a noticeable amount of share to Abbott.

The effect of these poor strategic decisions was that Reckitts launched what turned out to be a successful opportunistic bid, financed through debt.

There are four key reasons why Reckitts believes this acquisition to be fruitful:

  1. They think they can run the business better than MJ.
  2. MJ don’t have much of a presence in developed baby markets. For example, Reckitts can push MJ’s products through their strong European distribution network.
  3. India is Reckitts’ third largest market and MJ have no presence there.
  4. MJ do not have a full range of products that cater to the child as they grow out of infancy.

The proposed acquisition of MJ originally split the market. The argument against was that this is a new market for them and therefore they are being foolish attempting to enter a world they don’t understand. We believe this to be short-sighted; our stance has always been to trust the experienced management team. If they never expanded into new markets they would miss out on valuable opportunities – sexual health and the success of Durex being a prime example.

As far as the core business goes, they made mistakes with Scholl and Nurofen, but were unlucky with Korea. The declining trend in like-for-like growth rates needs addressing to give investors comfort that we are back to business as usual. That said, we look forward to seeing what Reckitts can make of MJ.

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