Reckitt Benckiser confirms Mead Johnson acquisition, full-year revenue rises

Nurofen and Durex maker Reckitt Benckiser confirmed that it will buy US baby milk company Mead Johnson for up to $17.9bn, while it also said that revenue and earnings grew in 2016 despite challenging markets and products.

The FTSE 100 company is to buy Mead Johnson for $90 per share in cash, valuing Mead Johnson's equity at $16.6bn with the total value of the deal coming to $17.9bn including net debt.

For calendar 2016, revenue increased 11% to £9.89bn, or 2% on a constant currency basis, compared to the previous year and like-for-like revenues rose 3% on constant currency.

The health and hygiene division led LFL growth of 4% due to its broad portfolio which offset a decline in sales of brand Scholl/Amopé.

The gross margin increased by 180 basis points to 60.9% due to tailwinds in the price of commodities and cost optimisation initiatives by the company, while the adjusted operating margin was up 130 basis points to 28.1%.

Net income grew 15% to £2.15bn, or 4% on constant currency basis.

Diluted earnings per share rose 6% to 256.59 each.

The company had exceptional costs of £367m, principally due to the respect of the scandal in South Korea, where the government launched an investigation to look into a humidifier sanitiser sold by the company's business unit in the country between 2001 and 2011, as an ingredient in one of its product was linked to nearly 100 deaths.

Reckitt recommended a final dividend of 95p per share, up from 88.7p in 2015 with total dividend for 2016 coming to 153.2p, for a 10% increase.

Chief executive Rakesh Kapoor said: "2016 was a good year in which we achieved broad-based growth and excellent margin expansion, despite challenging markets and an unusual number of issues.

Kapoor added that the company remained focused on its powermarkets, powerbrands and virtuous earnings model and brought new products to the market including Veet Sensitive Trimmer, and Wave toilet block, launched under Harpic, Cillit Bang and Lysol, but had We had poor in-market results from the new Wet & Dry, rechargeable pedi product, launched under the Scholl/Amopé franchise.

“We are never happy when an innovation misses the mark, and we are proud of a culture that allows people to push ideas they passionately believe in. As such, we have to also accept that with a multitude of successes, comes the occasional failure. The important lessons have been learned. I am confident we have an exciting innovation pipeline for 2017 which has the right balance for growth and outperformance.”

The company saw slower growth in 2016, across developed and a number of emerging markets, although Russia and the US in particular were tough, Turkey and Saudi were impacted by geopolitical issues. This was partly offset by strong performances in India, China, Indonesia and Thailand.

Kapoor said that the has “made a public and personal apology to the victims who suffered lung damage from using Oxy RB's humidifier sanitiser product” in South Korea, and stressed that “the harm that resulted from the use of humidifier sanitizers sold by Oxy RB and other manufacturers can never be allowed to happen again”.

Looking to 2017, he said the company expects macro conditions to remain challenging, and for a number of existing headwinds to persist in the first half.

“We remain confident in the strength of our business and choices across powerbrands and powermarkets. We are targeting like-for-like net revenue growth of 3%. For operating margin, we reiterate our medium term target of moderate margin expansion.”

Meanwhile, for the Mead Johnson acquisition the company targets Mead Johnson to perform at the upper end of estimated category growth of 3-5% per year in the medium to long term with about £200m in annual cost savings by the end of the third full year.

It also expected to be accretive to adjusted diluted earnings per share in the first full year and double-digit accretive by the third year, with return on invested capital projected to exceed RB's cost of capital by the fifth year of ownership.