Reckitt has a job to do after Pfizer pursuit fizzles

British hygiene firm Reckitt Benckiser’s decision to drop its pursuit of Pfizer’s consumer health assets leaves it with a tough job to restore growth to its flatlining business.

With a deal off the table, investors will turn their attention to Reckitt’s internal challenges, including the integration of Mead Johnson, the ailing baby formula maker it bought for $17bn in 2017, and reigniting sales growth.

“The market has been used to Reckitt being the company that consistently delivered ahead-ofmarket volume growth and last year they didn’t,” said Reckitt shareholder Steve Clayton at Hargreaves Lansdown. “They really need to pick the crown up and get it back on their head.”

Reckitt has forecast 2%-3% like-for-like sales growth for 2018, after no growth in 2017.

The consumer goods company was in the running for some of the consumer health brands being sold by Pfizer. Many investors worried about Reckitt’s ability to fund and manage a deal that could have reached $20bn so soon after buying Mead Johnson.

Following news late on Wednesday that Reckitt had abandoned the auction — after Pfizer rejected its bid for some of the assets — its shares jumped 6% as investors breathed a sigh of relief there would be no dilutive issue of equity or new distraction for senior management.

Since October, when Pfizer announced it was exploring options for its consumer health unit, Reckitt’s shares had fallen 21%, in part on concerns about a possible deal. Even after Thursday’s gain, the stock is only at 16 times forecast earnings, below its five-year average of 19.

“We caution on being too optimistic over the prospects of a quick fundamental turnaround of the core businesses,” said Barclays analyst Alex Smith.

“In particular, we still see too many uncertainties around the cost and cultural change required to restore growth and competitiveness,” he said.

The Pfizer business would have made Reckitt the global leader in consumer health.

Some analysts praised CEO Rakesh Kapoor’s financial discipline in walking away from Pfizer, but Bernstein’s Andrew Wood was disappointed.

“When Mead Johnson is fully integrated and [Reckitt’s] core business is back to health, we think it might regret having missed this once-in-a-decade acquisition opportunity for global … leadership,” he said.

SOME ANALYSTS PRAISED CEO RAKESH KAPOOR’S FINANCIAL DISCIPLINE IN WALKING AWAY FROM PFIZER

With the consumer health market very fragmented, there will be opportunities to grow in future, but it will be slower.

Jefferies analyst Martin Deboo said that without Pfizer, “these would now either need to be gestated organically or acquired more painstakingly via sequential bolt-on deals”.

Yet, if Pfizer decides to keep its business for now, Reckitt could be in a better position in a few years’ time.

“If the sale falls through altogether and they get another couple of years to sort the balance sheet out, maybe it will be an opportunity in the future,” Clayton said.