Reckitt Benckiser to sell baby formula unit in $2.2bn deal

Reckitt Benckiser has agreed to sell its baby formula business in China to the private equity firm Primavera, as it seeks to bring an end to its struggle with a division that has weighed on its growth for years.

The deal values the unit at $2.2bn. The UK-based consumer goods company expects to receive about $1.3bn in cash from the transaction, which it will use to pay down debts, and will keep an 8 per cent stake in the unit, it said in a statement on Saturday.

The deal will help Reckitt “to rejuvenate growth and create long term value,” its chief executive Laxman Narasimhan said in a statement, adding that the group is “actively, and decisively, managing our portfolio.”

Reckitt entered the baby formula business in 2017 when it bought US baby milk group Mead Johnson in a £13bn deal, part of a push by former chief executive Rakesh Kapoor to refocus the company on higher-margin consumer healthcare products. The unit makes brands such as Enfamil.

However, it has since hit difficulties, partly because of falling Chinese birth rates and local competition.

Last year, Reckitt took a £5bn impairment on the acquisition of Mead Johnson, writing off almost a third of its previous book value.

In 2018, a production outage at the business’s Dutch baby formula factory left Reckitt unable to meet customer demand, knocking £70m off the company’s revenues and hitting its share price.

Martin Deboo, an analyst at Jefferies, said in March that he thought Reckitt’s shareholders “would be happy to be out [of the China baby formula business] at almost any price”.

Reckitt expects a net loss of about £2.5bn as a result of the sale to Primavera, as it remeasures the unit’s goodwill and intangible assets, it added.

The company’s baby formula division as a whole reported a 7.4 per cent sales decline in the first quarter of 2021, compared to a year earlier.

Under the deal Primavera, which has previously invested in Alibaba, Ant Group and ByteDance, will take control of Reckitt’s manufacturing plants in the Dutch city of Nijmegen and Guangzhou in China.

Reckitt will still own the Mead Johnson and Enfa brands but Primavera will have a royalty-free permanent licence to use them in China.

Narasimhan, who took over in 2019, has been seeking to turn round Reckitt’s performance, which had suffered towards the end of Kapoor’s tenure.

Its like-for-like revenues rose 4.1 per cent in the first quarter of this year, it said in April, as sales of hygiene products such as Lysol disinfectant soared.

Narasimhan said Reckitt was keen to grow its other businesses in China, the largest market for its Durex condoms.

Fred Hu, founder and chair of Primavera, said the deal would lead to a “strong collaboration” with Reckitt.

The Guangzhou-based China baby formula business employs about 3,000 people and made £861m in net revenues in the year to December.

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