The Pfizer Drugs Didnt Work for Reckitt Dont Get So Excited

(Bloomberg Gadfly) -- The drugs didn't work for Reckitt Benckiser Group Plc.

The company said late Wednesday that it had terminated talks with Pfizer Inc. about buying part of its consumer health business. The whole division was valued at about $15 billion to $20 billion, and may have stretched Reckitt's balance sheet and management bandwith.

Chief Executive Officer Rakesh Kapoor was primarily interested in Pfizer's Advil business in the U.S., but didn’t want to take everything else. He deserves some praise for being disciplined enough to walk away, particularly when he is so enamored with consumer healthcare.

Investors certainly think he has made the right decision, with the shares rising as much as 8 percent, the most in a decade, before falling back slightly. Reckitt has avoided not only over-paying, but also a possible rights offering.

The Pfizer Drugs Didnt Work for Reckitt Dont Get So Excited

But that reaction looks somewhat shortsighted.

Doing this deal wasn't as hard as it seemed. Reckitt is still highly cash generative It's recently split its operations into its health brands on the one hand, and hygiene and home goods on the other, and this puts it into a better position to offload some slower-growing brands -- perhaps at a decent price. This should alleviate some concerns on financing and management of an acquisition.

What's more, there's an opportunity cost to giving up now. Kapoor's strategy was always all about expanding in over-the-counter medicines. 

With Pfizer seemingly off the table, the investment case is now about improving the Mead Johnson business which Reckitt acquired last year and wringing synergies from the deal. It has made progress on both these fronts, but grinding through the crowded baby milk market is a far cry from plugging in consumer remedies and giving them a touch of the Reckitt magic. It must also boost sales of the home brands, such as Vanish and AirWick.

If organic sales growth doesn't improve after the stumbles of 2017, there's a risk an activist investor could seek a break-up.

It looks like Glaxo SmithKline Plc is in pole position to pick up the Pfizer portfolio. It's submitted a binding bid. If this is accepted, that would strengthen one of Reckitt's key competitors.

The Pfizer Drugs Didnt Work for Reckitt Dont Get So Excited

But the deal isn't done yet. If the two sides fail to reach an agreement, that could play into Kapoor's hands. He may be able to pick up Advil at a later date. By this time, debt will be lower, and Mead Johnson more fully integrated. What's more, dedicated management of the home and hygiene business should elevate the sales multiple if it were to be divested as part of the deal.

Walking away from such a coveted asset looks embarrassing. But Kapoor might yet have played a winning hand.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

To contact the author of this story: Andrea Felsted in London at afelsted@bloomberg.net.

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