Debt misaligns Reckitt’s risk profile and shareholder returns
The $17bn Mead Johnson deal looks likely to ensure CEO will meet his payout targets
Pulling hairs from the tail of a sleeping tiger is risky enough. It is foolhardy when the tiger is half-awake and has bald patches.
Reckitt Benckiser’s pay plan for Rakesh Kapoor, chief executive, may be all that is needed to turn UK investor groups nasty. Egged on by politicians, they are already grouchy.
Last week, a third of shareholders in Thomas Cook, whose remuneration committee chairman Warren Tucker is also on Reckitt’s board, voted against its executive bonus scheme. A couple of weeks before, investors forced Imperial Brands to retreat from a big bonus increase for boss Alison Cooper.
That is a foretaste of what to expect at pay votes this year, which will reach their height in a couple of months. Nearly two-thirds of listed UK companies will have to put their policies and the structure of executive rewards to a triennial binding vote.
Reckitt had its triennial vote last year. Nonetheless, Mr Kapoor’s pay, which ranks him among the top 15 best paid chiefs in the US and UK, reopens an old sore for many investors. His bonuses and long-term incentive plans are measured purely on revenue and earnings per share growth.
The acquisition of Mead Johnson for $17bn will be earnings accretive within a year, and looks likely to ensure that Mr Kapoor will meet his payout targets next year and the year after.
If Reckitt can guarantee to boost investor returns by as much and as fast, they will be happy. They have a Mr Micawberish rule of thumb — returns on capital should exceed the cost of capital by year three.
But Reckitt, which is increasing borrowings by about $16bn to buy Mead Johnson, says returns will only rise above the cost of capital by year five. Net debt will be four times earnings before tax and other negatives in the first year.
Moody’s, which is reviewing Reckitt's credit rating, talks about “very high leverage”. A very large UK shareholder puts it another way: “Eek”.
Yet Reckitt’s board seems oddly oblivious to tensions in the tiger enclosure. Perhaps that is because the chairman of nearly two decades, along with two of the other three non-executive directors on the remuneration committee, are based in the US. There, executive pay has been a less incendiary topic.
Whatever the reason, it may be time for Reckitt’s remco to don ear muffs. This year’s vote on the remuneration report due around May may not be binding but the noise could still be deafening. Apologists for high executive pay dismiss rows as the politics of envy when they are in reality symptoms of disquiet over strategy.
Shareholders might be less antsy if Mr Kapoor’s performance were measured against returns on capital as well as earnings. That won’t change past payouts. The group’s return on capital has anyway been between 15 and 20 per cent a year for the past five years.
But it would reassure investors that their interests as providers of capital were aligned with the users of it.
Lombard found bouncing across Africa’s river beds in a Land Rover Defender and changing gear with both hands to be bodily elevating, not spiritually. It was like driving an Aga on wheels.
Jim Ratcliffe, founder and boss of Ineos, the UK’s largest private industrial business, likes physical challenges and clearly has had better times in the classic 4x4.
He is one of a huge fan club for the off-roader, which hasn’t much changed from its inception in 1948.
Only Mr Ratcliffe, though, could think of taking up manufacturing the 4x4 when Jaguar Land Rover canned production in 2016.
Ineos says it will have a new lookalike Defender on the roads by 2020. JLR, meanwhile, has plans of its own to restart production of Defenders and has already proven it is jealous of the name.
Mr Ratcliffe is not someone to bet against lightly. He sidestepped bankruptcy during the financial crisis, took on the unions at Grangemouth and is still about the 30th richest man in the UK.
He fights his corner and take bets that outsiders find unfathomable. Ineos is now transporting shale gas in freezer-ships built in Asia from the Gulf of Mexico to its petrochemical plants at Grangemouth.
Nonetheless, a race to produce Defenders will be slow and painful to watch. The off-roader has advantages. It is relatively easy to repair even in sub-Saharan salt pans. But Ineos says its version will be built on traditional lines. The chassis will be on an existing base frame, and don’t expect satnav.
Tooling up an assembly line to make the Ineos 4x4 both safe, green and commercial will be expensive and heavy going.
Most people have ways of taking refuge from reality. A former colleague would take Proust to the stairwell when things were grim. Mr Ratcliffe has greater resources to go where he likes to escape. But other Defender fans should not bank on being given a ride.