Vanishing Vanish

Reckitt Can Cut More Mustard

Vanishing Vanish stain remover, for instance.
At Closing, May 25th
6028.00 GBp
At Closing, May 25th
57.77 USD

Rakesh Kapoor's pay isn't the only thing being cut at Reckitt Benckiser Group Plc. Now, the consumer goods group is considering putting its food business on the block.

That's a sensible move, given that Reckitt's $16.6 billion acquisition of baby formula maker Mead Johnson Nutrition Co. raises both debt and risk for the company. In fact, it should go further, and consider putting some of its home brands up for sale too.

The food division, primarily the French's mustard brand, accounts for just 4 percent of Reckitt's sales. But the potential price tag of about 2 billion pounds ($2.5 billion) stands to make a pretty decent dent in borrowings. The Mead purchase elevates Reckitt's debt to 3.8 times Ebitda, and selling food would bring that down to 3.4 times, according to analysts at Kepler Cheuvreux.

Reckitt is highly cash generative, and would have been able to cut its debt pretty quickly anyway. But bringing debt down faster would remove an element of risk.

That would be welcome, given the sheer complexity of the Mead deal. Baby formula hasn't been a key area of expertise for the company in the past, and the market has stuttered recently. There will also be different geographies to contend with -- Mead generates 30 percent of its sales from China.

Saucy Share

Reckitt Benckiser's food business is small compared with the market leaders in sauces and dressings

Source: Euromonitor

That all adds up to a significant management challenge. So anything that Reckitt can do to cut complexity, it should.

There should be no shortage of interest in the division, which could appeal to Kraft Heinz Co. or McCormick & Co. And, as Gadfly has argued, private equity groups are also salivating at some of the non-core food assets within the bigger consumer goods companies, so Reckitt's offering could appeal to such a buyer.

Looking for Love

Reckitt's food and home businesses are among unloved assets within big consumer goods groups

Source: Jefferies, Bernstein

Note: All values are estimated proceeds

Strong interest in the food business could encourage Reckitt to go further with its portfolio shake-up.

Other brands that sit outside of its health and hygiene business, which has been the company's main focus, include Airwick air fresheners, Vanish stain remover, Woolite washing detergent and Calgon water softeners. Together, these secondary brands could be worth about 6 billion pounds.

Risk On

Investors have shrugged off the risks from the Mead Johnson deal

Source: Bloomberg

In selling off foods, Reckitt has made a good start in addressing concerns around the Mead Johnson deal. But disposing of the home brands would cut complexity further, and make an even bigger dent in the debt pile, easing risks stemming from the transaction. 

--With assistance from Gadfly's Chris Hughes in London.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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