Enfamil Maker Reckitt Shops Baby-Formula Unit Amid Shortage
Sale process comes at time of upheaval in key U.S. market
Reckitt Benckiser Group RBGLY 0.51% PLC is pushing ahead with a multibillion-dollar sale of its infant-formula business as severe shortages scramble the key U.S. market.
Reckitt kicked off a sale process for its formula business last month, with first-round bids submitted this week, according to people familiar with the matter. Bidders include buyout firm Clayton Dubilier & Rice, they added. The unit could fetch around $7 billion, some bankers and analysts have estimated.
The sale process comes against the backdrop of a nationwide shortage that has thrust the more than $4 billion U.S. formula industry into the spotlight, with parents left scrambling to find supplies and company executives facing questions from lawmakers.
Recent upheaval in equity markets is another complicating factor, bankers say, and there is no certainty a deal will be completed.
Baby formula has been in short supply for months partly because of supply-chain issues caused by the Covid-19 pandemic. Product recalls and a production halt by Abbott Laboratories exacerbated the shortages.
Abbott closed its Sturgis, Mich., plant, which makes Similac and other brands, in February after the Food and Drug Administration said it found the presence of a germ called cronobacter sakazakii, which can be deadly in infants, in the factory. The germ wasn’t found in products. Abbott has since said it aims to reopen the plant in the first week of June.
To help alleviate shortages, Reckitt has said it is running its factories 24/7, including on Sundays, to increase production. The company has also narrowed production to increase volumes, focusing on sizes it says allows it to provide the most formula. It has also said it is working with the FDA to expedite formula imports from Mexico.
Reckitt has been a major player in the global formula industry since it agreed to buy Mead Johnson Nutrition for $16.6 billion in 2017. The deal handed the London-listed company a range of nutritional products including Enfamil and the Sustagen milk supplement for children.
But formula hasn’t been a top performer for Reckitt, which also makes Lysol cleaning products and Nurofen painkillers. The company took a write-down of 5 billion pounds, equivalent to $6.3 billion, on its formula business in 2020, citing challenges in China, where birthrates have slowed and competition from local players has been fierce.
Reckitt sold the bulk of its infant-formula business in China last year in a deal that valued the business at $2.2 billion including debt to China-based investment firm Primavera Capital Group. It has also exited other markets, including Argentina.
That left Reckitt with a formula business in the U.S., the Philippines, Mexico and Thailand, among other countries. Analysts say Reckitt has gained market share in the U.S. in recent years, and that the country makes up about half its formula division’s sales but nearly two thirds of its operating profit.
The Abbott recall has significantly shifted market share in the U.S., with Reckitt now holding about 55% compared with roughly 40% previously, according to analysts at Barclays. The firm says Abbott’s share has dropped to 20% from around 40%.
Barclays estimates Reckitt could retain as much as a quarter of its recent share gains since parents who switch to Enfamil or another formula are unlikely to switch back once Abbott’s production resumes.
Those changes could complicate the landscape for prospective buyers of Reckitt’s formula business, say some industry executives and bankers.
“The question a buyer will have is ‘I can foresee a big jump in sales but am I going to hold that share,’” said Tim Brown, who ran Mead Johnson’s U.S. business during an Abbott recall of beetle-tainted Similac formula in 2010. Mr. Brown said he expects Reckitt’s formula sales to stay higher for at least the next two quarters.
However, Jefferies analyst Martin Deboo said that in the longer term the current shortages could lead to reform of the federal Women, Infants and Children program, which provides formula at no cost to families and effectively guarantees Reckitt about 18% of the U.S. market.
Reforms could open up the possibility of more competition from Gerber owner Nestlé SA and France’s Danone SA, which have about 10% and 1% of the U.S. market, respectively, said Mr. Deboo. That is “not necessarily a good look, in the midst of a reported sale process,” he added.
WIC is the largest buyer of infant formula in the U.S., making up more than half of annual formula sales, according to the Agriculture Department, which oversees the program.
The system has created a greater reliance on WIC-approved formula manufacturers by requiring states to contract a single supplier, giving the winning company a majority of market share. The program requires retailers to stock more of WIC-approved brands, which leads to greater sales among non-WIC consumers, too.