S&P downgrades Reckitt Benckiser long-term debt one notch to A-

Standard & Poor's took Reckitt Benckiser down a notch due to the higher debt that would result from its acquisition of US rival Mead Johnson.

The ratings agency downgraded its ratings on Reckitt's long-term debt by one notch to A-, while removing them from Credit Watch with negative implications.

Its outlook on the new rating was 'stable'.

S&P said RB should continue to grow profitably in hygiene and consumer health thanks to the addition of MJ's infant formula and children nutrition units.

The new assets would account for roughly 20% of the combined group's revenues and earnings before interest, taxes, depreciation and amortisation in 2018, helping to diversify its product range in consumer and health and boost its exposure to Asia and Latin America.

Nevertheless, the all-cash, all-debt funded $17.9bn acquisition would push Reckitt's leverage to over four times its operating profits on an EBITDA basis, falling to 3.5 times two years after closing.

Strong free cash flow of about £2.0bn annually - supported by growth in hygiene and health products - would enable the latter, S&P said.

There are also integration risks to consider, with the transaction being the largest ever by Reckitt, although the firm had a good track record.

It had successfully turned SSL International and Boots Healthcare International into core units, S&P argued.

S&P touted the company's low cyclicality and high profitability, with EBITDA margins between 27% and 28%, and leading market positions in hygiene products and consumer health as its main strengths, with the latter highly profitable and growing.