US purchase haunts Reckitt

Reckitt Benckiser’s purchase of baby-milk maker Mead Johnson Nutrition in 2017 was an “absolute howler”, says Alistair Osborne in The Times. Mead’s value was written down by £8.5bn shortly afterwards, with much of the business then sold off.

However, things got worse last Friday. An Illinois court ordered Reckitt to pay $60m in damages to a mother whose premature baby died after being given Mead’s Enfamil formula milk in intensive care. The news wiped 15% off the stock. Reckitt hopes to overturn the verdict, but the group “now has a US litigation overhang on its share price similar to the one GSK has suffered over the heartburn drug, Zantac”.

Reckitt’s investors “have reason to fear further legal ramifications”, as the jury “awarded the plaintiff substantially more money than she requested”, says Aimee Donnellan on Breakingviews. If all the 1,000 baby-formula cases paid out at the same rate, and were split with Abbott Laboratories, the other defendant, Reckitt would owe £23bn. Still, “jittery shareholders” should forget any parallels with Bayer and Monsanto, as the problem is not with the product itself.

Parents “were not properly informed of the health risks associated with baby formula and premature babies”. With Barclays assuming a worst-case hit for the company of just £2bn, the market’s judgment may turn out to be pessimistic.

Reckitt is now “worth a lot less than the sum of its parts”, says Lex in the Financial Times. But while the share-price fall makes a break-up of the company “more attractive”, it also makes it “harder to execute”. Reckitt considered selling the infant-nutrition business two years ago but would “struggle to find willing buyers” now.

Similarly, while selling the “valuable health business” would be much easier, it would risk leaving shareholders with “wads of cash and an unattractive rump”. A spin-off, with large amounts of cash to act as a barrier against future litigation costs, may be the best option left to unwind the “problematic deal”.