City News: Relief for Reckitt Shareholders on Sale of Chinese Baby Food Business | news

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It’s not often that investors see a $ 2.5 billion loss.

Consumer health giant FTSE 100 announced over the weekend that it had closed a deal to sell its infant formula business in China to private equity firm Primavera for $ 2.2 billion.

The group will continue to own the Mead Johnson and Enfa brands, sell a royalty-free perpetual license to use them in China, and retain an 8% stake in the entity. The transaction will generate cash proceeds of approximately $ 1.3 billion, but will also incur tax costs of approximately £ 300 million and other transaction costs of approximately £ 200 million. Overall, the company expects a net loss of £ 2.5 billion on the transaction, taking into account the revaluation of its assets and write-downs on the company’s book value.

It’s a sad reversal of its strategy of expanding into higher-margin consumer health products when it spent £ 13 billion on the acquisition of Mead Johnson under former CEO Rakesh Kapoor.

The troubled unit failed to meet growth expectations amid falling birth rates in China and increasing domestic competition, while the emergence of the coronavirus continued to affect trade and led to a business review in February. Reckitt had already written off £ 5 billion of its value in 2020, reflecting the unit’s struggles.

Reckitt’s broader baby food division reported a 7.4% drop in sales in the first quarter of 2021 and another £ 2 billion in value.

The company will use the proceeds to pay down debt, but is also part of a broader approach to refocus on growth areas – including expanding its other consumer health brands in China.

Hargreaves Lansdown commented, “Reckitt is pushing ahead with his business streamlining efforts and the sale will allow him to focus even more on his health and hygiene businesses, which on balance will be seen as a net benefit.”

Jefferies said the deal was also broadly positive, commenting, “Reckitt will be as good as devoid of what has become the millstone around the China baby’s neck to a gross valuation that is modestly above what has been reported in the media. ” However, the broker noted that a one-time charge of £ 500 million, consuming 40% of gross proceeds, could negatively surprise the market.

Reckitt’s shares are down about 20% since last summer as battles over baby food weighed on booming sales of its cleaning and health products. The stock fell 0.7% to 6,440p on Monday, but was back at 6,473p on Thursday, just 0.2% below its closing price before the news broke.

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