Reckitt sells part of disastrous 2017 acquisition

“The FTSE 100 made a tepid start on Monday on some weak Chinese export data and comments from US Treasury Secretary Janet Yellen that she would not be averse to higher interest rates because it would signal the economy was on the mend,” says AJ Bell investment director Russ Mould.

“While this seems a perfectly logical and reasonable statement, it contains a hint of menace for the markets given what rising rates normally mean for the performance of equities.

“This hint of menace might become something more genuinely frightening for investors if it is followed by a high level of inflation when the US figures are published later this week.

“Very quickly the issue of rising prices and their impact on monetary policy could become front and centre again, after being pushed to the back of the market’s mind by a US jobs report on Friday which, while not terrible, presented a fragile enough picture of employment to suggest the US Federal Reserve would maintain low rates and financial stimulus for longer.

“The 8.2% advance in the Halifax House Price Index demonstrates the UK housing market is still in runaway mode supported by the stamp duty holiday and people looking to move for more space in different locations in the wake of the pandemic.”

Reckitt

“Reckitt’s deal to sell its China baby formula business helps to draw a line under one of the biggest strategic mistakes in its history.

“Questions were asked right from the start as to why Reckitt spent so much money buying Mead Johnson, a baby milk group which generated approximately half of its sales in Asia at the time of the acquisition in 2017.

“Competition has been tough in the China baby formula market and the acquisition turned out to be a major disappointment. Three years after the deal, Reckitt took a £5 billion goodwill charge linked to the purchase of Mead Johnson, effectively putting its hands up and saying it got it wrong.

“At the same time, the company scrapped its margin improvement targets for the acquired business and now the China-focused part of Mead is being sold.

“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.

“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.

“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.

“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.”

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