Reckitt Benckiser: a rock and a hard place
Rakesh Kapoor’s legacy includes a restructuring that looks rather like a time-delayed break-up
Rakesh Kapoor introduces Adrian Hennah as both a “rock” and a “rock star”. The finance director epitomises solidity rather more obviously than showmanship. With Mr Kapoor stepping down as chief executive of Reckitt Benckiser, resilience will be de rigueur at the big consumer goods group. Mr Kapoor’s legacy includes a restructuring that looks rather like a time-delayed break-up.
Investors were more focused on margins as the owner of brands such as Nurofen and Calgon reported full-year results. Reckitt turns sales into profits at a rate that leaves rivals in the dust. The adjusted operating margin only slipped 60 basis points to 26.7 per cent. Messrs Kapoor and Hennah forestalled fears this marked the start of an unstoppable trend. The shares duly bounced 4 per cent.
That lifted Reckitt’s enterprise value to £55bn, within spitting difference of a £57bn sum-of-the-parts valuation from Jefferies last summer. Rival brokers have generated similar numbers, imputing higher or lower earnings multiples for such component businesses as headache cures and baby formula. In general, the conclusion of such counterfactual exercises at a multinational is usually that it would be worth more to investors if it demerged Parts A and B.
This would become easier for Reckitt in 2020, following a bifurcation within the Reckitt wrapper. The group will then consist of a Health division, selling such remedies as Mucinex for colds, and Hygiene and Home, with products supposed to stop customers getting ill in the first place.
Mr Kapoor’s bet, as he quits the field of play, is presumably that no demerger will be required, because the value of Reckitt businesses will already be in the stock price. Margins matter here because profitability is lower at HyHo, as Reckitt’s lesser division is known in unwitting tribute to Disney’s Seven Dwarfs.
This may hold back shares currently trading at 18 times forward earnings. If so, Mr Kapoor’s successor may face calls for the sale of divisions at prices lifted by trade buyers’ scope for big cost savings. That would be an affliction no mere sniffle remedy could cure. Call it a hospital pass.