What Sale Could Mean for Reckitt Benckiser

On April 3, 2017,  Reckitt Benckiser (RBGLY) confirmed media reports that it is carrying out a strategic review of its food business. This is consistent with our thesis that management is building a strong consumer product portfolio, and we would regard a sale of the food segment as a sensible step towards deleveraging from the Mead Johnson acquisition. We maintain our GBX 7,000 fair value estimate for the time being, but we may review our narrow moat rating if the firm disposes of the food business, as we believe Reckitt’s transformation to a consumer health pure play will materially enhance its pricing power.

We estimate Reckitt’s food business, which contains brands such as French’s mustard and Frank’s Red Hot sauces, could be worth between GBP 1.5 billion and GBP 2.0 billion, representing a range of 14-19 times EBITDA. This is a fairly high valuation range within the food industry, but Reckitt’s brands generate EBIT margins in the mid-20% range, well above the industry standard. We think the reported price tag of GBP 2 billion is ambitious and probably only achievable if multiple bidders emerge. The most likely strategic buyer, in our opinion, is Kraft Heinz, which recently made an approach to Unilever. Private equity firms may also be interested. On the other hand, there is a risk that the availability of other food assets may hand some of the negotiating power to the buyers. We expect to hear the outcome of Unilever’s strategic review by the end of this month, and while we don’t expect the company to dispose of its entire food business, a sale of certain food assets--particularly the spreads business--seems a likely outcome. Food lags consumer health and infant formula in pricing power, and we are not surprised to see it being labelled "noncore." Depending on the valuation raised and on management’s determination to deleverage quickly, we also regard the home portfolio as a dispensable asset in Reckitt's transformation into a consumer health pure play.

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