Reckitt selling China baby-formula business to Primavera
US$2.2 billion deal comes amid fierce competition from local brands
7 Jun 2021 | The Asset

Reckitt Benckiser Group is selling its infant formula and child nutrition (IFCN) business in Greater China to Beijing-based investment firm Primavera Capital Group for an enterprise value of US$2.2 billion.

The deal comes after the British consumer health, nutrition, and hygiene company conducted a strategic review of its IFCN business in China in February 2021 as sales remained lacklustre amid fierce competition from local brands. The country’s 150 billion yuan (US$23.4 bilion) infant milk formula market is the largest in the world.

Reckitt, headquartered in Slough, England says in a statement it will retain an 8% stake in IFCN China, and anticipates net cash proceeds to be approximately US$1.3 billion.

As a result of the sale, Reckitt expects to incur a net loss of around 2.5 billion pounds (US$3.54 billion) principally relating to the re-measurement of goodwill and intangible assets for IFCN China. It expects to incur cash tax costs of around 300 million pounds and transaction and other costs of around 200 million pounds.

Debt reduction

The net proceeds will be used to reduce net debt and would have lowered its December 2020 net debt/adjusted EBITDA ratio by around 0.2x to 2.2x.

The deal is structured as a sale of the entirety of IFCN China, including the manufacturing plants in Nijmegen, the Netherlands and Guangzhou, China, Reckitt says. It includes a royalty-free perpetual and exclusive licence of the Mead Johnson and Enfa family of brands (Enfinitas, Enfamil and Enfagrow) in mainland China, Taiwan and Hong Kong.

Following completion of the transaction, Reckitt will continue to own the Mead Johnson and Enfa family of brands globally and will operate those brands in the rest of the world.

As at December 2020, IFCN net assets totalled 8.8 billion pounds on a global basis. Following the definitive agreement to sell lFCN China, Reckitt's IFCN net assets have been separated geographically for accounting purposes, with 3.4 billion pounds allocated to China and 5.4 billion pounds allocated to North America and the rest of the world.

Long-term value

Commenting on the sale, Reckitt chief executive officer Laxman Narasimhan says: "Today's announcement marks another step in our strategy to rejuvenate growth and create long-term value. As part of this journey, we are actively, and decisively, managing our portfolio. After a thorough review of IFCN China, we have found an excellent home for the business under the ownership of Primavera. As a result of this transaction, our nutrition business going forward will have a better and more consistent growth and margin profile.”

"We remain committed to China with our hygiene, health and VMS (vitamins, minerals and supplements) portfolios. We are excited about the opportunities to grow our brands and expand our business in the future. China is Durex's largest market and growing strongly and it is an important market for Dettol, Finish and our VMS brands with significant potential for future expansion.”

For his part, Primavera founder and chairman Dr. Fred Hu says: "We look forward to a strong collaboration with Reckitt, to continue to build on the heritage and strength of the Mead Johnson brand. We have considerable experience investing and growing and expanding global brands in China. We are excited to support the business in its next phase of growth, leveraging our resources and local leadership."

The deal is subject to consultation with Reckitt's works council in the Netherlands and satisfaction of customary requirements. It is expected to be completed in the second half of 2021.

HSBC acted as financial adviser to Primavera on the transaction.

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