Right: Absence of material near-term M&A options
Our Underperform rating on Reckitt has been centred upon a belief that Reckitt will struggle to
execute material near-term M&A given a dearth of suitable available opportunities. With it now over
two years since the last meaningful acquisition (BMS Latam), we claim (a hollow) victory.
But very wrong: Health much stronger than we anticipated and likely to continue
On the other side, we have to confess that we materially under-estimated the strength of organic
growth in the Health business. Alongside SCA, Reckitt is now the fastest growing EU HPC major,
something that looks likely to continue near-term (imagine growth rates when EM starts to properly
fire again). The growth of Health has important valuation implications (now a majority of the equity).
Consumer Health: ‘In Vogue’ as opposed to ‘Not in Vogue’
We have written extensively on the changes impacting both the HPC industry (see Not in Vogue
Part I and Part II) and Food industry (see 3G or not 3G). Our equivalent analysis of Consumer
Health (see within), shows that it is not without threat (US private label in particular), but it is
nonetheless relatively insulated from ‘Not in Vogue’ disruption.
Mid-term M&A options looming on the horizon, more specifically Pfizer
We see increasing scope for mid-term M&A, more specifically Pfizer. Something will happen here.
We view it likely that the post-split Innovative business will seek to undertake an inversion with
either pharma (Consumer Health likely then being acquirable) or even (less likely) Reckitt itself (the
maths work well in the context of tightened inversion rules).
For the good of our Health
So will we continue to bet against Consumer Health (and the associated mix-based valuation
ratchet), very shareholder friendly management and the increasing possibility of mid-term M&A?
For the good of our health, we won’t. We revise our rating to Outperform (from Underperform) and
target price to GBP66 (from GBP58).