RBC Capital downgrades Reckitt Benckiser

RBC Capital Markets has downgraded Reckitt Benckiser to ‘underperform’ from ‘sector perform’ and cut the price target to 6,300p from 7,000 following the company’s confirmation it is in advanced talks to buy US baby milk company Mead Johnson for around $16.7bn.

The Canadian bank said it is not convinced the proposed acquisition works strategically, operationally or financially and if it does it comes with a higher level of risk than anything Reckitt has acquired before because of the size of the deal.

“In 2013 CEO Rakesh Kapoor set out three criteria required from an acquisition: it should be strategically compelling, be worth more to RB than its existing owner and create value, not just increase earnings per share. We’re not sure Mead Johnson ticks any of these boxes.

“We’ve heard two schools of thought regarding RB’s putative acquisition of Mead Johnson: it’s cleverly opportunistic, with the most likely counterbidder (Danone) fully occupied acquiring WhiteWave and the Mead Johnson share price down 25% since the summer; or it’s a sign that RB is running out of steam and management is buying growth to compensate. We’re not sure the two are mutually exclusive.”

RBC said that strategically, Mead’s infant milk formula (IMF) business can be described as adjacent to RB’s existing business, but some way from being strategically compelling. It noted that Reckitt’s management has no experience of the IMF business, so it feels like guesswork whether the business will be worth more as part of RB than a stand-alone entity.

“What we do know is that RB has never tried anything remotely on this scale: if it goes through, the purchase of Mead Johnson will cost almost twice as much as all the other acquisitions RB has ever made put together. We think the risk associated with the RB investment case has increased materially, while the prospect of a slowing core business and steeply declining return on invested capital is not one we regard with equanimity.”

At 1325 GMT, Reckitt shares were down 1.6% to 7,018p.