Reckitt Benckiser will retain an 8% stake in the business
Reckitt Benckiser (LON:RKT) will make a £2.5bn loss by selling its underperforming baby formula business in China to a private equity company called Primavera Capital Group.
The FTSE 100 consumer goods company took over the business four years ago as part of its acquisition of Mead Johnson. The deal for the baby milk group came to $16.6bn.
Reckitt will now sell the majority of the Chinese division to Primavera for $2.2bn. The deal will amount to $1.3bn once costs are taken into account.
Once all costs are factored in, including goodwill, Reckitt will lose £2.5bn with the sale. It will also retain an 8% stake in the business.
“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,” said AJ Bell investment director Russ Mould.
“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.”
The Reckett board put some of the business’ struggles down to closures of the Hong Kong border during the pandemic.
The consumer goods company wrote down the value of the baby milk business by £5bn, a fall in its book value of nearly 33%, as executives conceded that future profit margins would not meet their hopes.
Reckitt Benckiser chief executive Laxman Narasimhan said: “Today’s announcement marks another step in our strategy to rejuvenate growth and create long term value. As part of this journey, we are actively, and decisively, managing our portfolio.”
The FTSE 100 firm, based in Slough, employees 40,000 across the world in over 60 nations. During the pandemic, as demand soared, Reckitt saw its sales jump by 12% to £14bn.