UK-based multinational consumer goods heavyweight Reckitt Benckiser has long been linked with a sale of its infant-formula assets.
However, with the industry in the US now being hit by huge fines linked to lawsuits brought by families claiming products for premature babies can cause serious illness, are would-be buyers likely to be put off?
On Friday (26 July), US infant-formula major Abbott Laboratories was ordered to pay almost $500m in damages after a jury agreed by a majority that it hid the risks associated with its Similac Special Care 24 cow’s milk-based formula for premature babies.
Premature baby girl Robynn Gill suffered brain damage as a result of contracting necrotizing enterocolitis (NEC) after being fed with the formula.
Damages
In March, Reckitt was ordered by an Illinois jury to pay $60m in damages to the family of a premature baby who died after being fed its cow’s milk-based infant-formula, Enfamil Premature 24 powder, produced by Mead Johnson.
Reckitt indicated at the time it would appeal the verdict, as did Abbott after the latest court case, calling it an “erroneous decision”. Abbott argued in court that the formula does not cause NEC and that the Gill’s baby had pre-existing health issues.
But the reputational and financial risk linked to these verdicts remains and the prospect of floodgates being opened is very real.
TorHoerman Law, the legal firm in the Gill case, said it alone “represents 800 families that have been devastated by NEC due to misconduct of formula manufacturers and we are committed to obtaining justice for all of them”. It is widely estimated that more than 1,000 lawsuits have either been submitted already or are on their way.
In a post on LinkedIn after the verdict was handed down, TorHoerman Law said: “Abbott has known for years that its cow’s milk-based formula significantly increases the risk of NEC in premature babies and families like the Gills had their lives changed forever due to the company’s refusal to warn families and physicians.”
Tumbling share price
Sick and dying children is not something investors and shareholders want to be associated with and following the handing down of the Abbott verdict, Reckitt Benckiser’s share price slipped to its lowest level in a decade, tumbling 9.6% on Monday (29 July).
Reckitt paid $17.9bn to acquire infant-formula subsidiary Mead Johnson in 2017 but by April 2022 the London-listed group, home to brands including Dettol bleach and Nurofen painkillers, was working with advisers on moves to sell the assets, which include the Enfamil brand.
The previous year it had sold its infant-formula operations in China to local investment firm Primavera Capital Group, with Reckitt keeping an 8% stake in the business.
Strategic review
For the last two years, the infant-formula sale narrative has dominated much of the discussion around Reckitt and has been a popular theme amongst analysts on post-results calls.
Last week, Reckitt revealed it had begun a strategic review over the future of Mead Johnson, which the UK group described as “non-core”.
Mead Johnson sits within Reckitt’s nutrition division, the smallest revenue earner behind the hygiene and health units.
While CEO Kris Licht did not make the same “exit” commitment to Mead Johnson, a potential sale was not ruled out.
“The Mead Johnson Nutrition business, with its market-leading brands of Enfamil and Nutramigen, is now non-core and Reckitt will consider all strategic options to maximise shareholder value,” the company said.
Future in doubt
Licht said the company had taken “an important step forward to firmly establish Reckitt as a world-class consumer health and hygiene company,” which suggested the nutrition division does not have much of a future within the business.
Barclays analysts, led by Warren Ackerman, suggested at the time the litigation issues around infant-formula will “likely make a sale challenging until they have been resolved”.
When that will be is unclear. Reckitt is facing another trial in one of these actions in Missouri in September.
Uncertainty
Speaking after the Abbott court ruling, Dan Coatsworth, an analyst with AJ Bell, doubled down on that uncertainty.
He said: “A US court case has already awarded $60m in damages to a mother who said her baby died after consuming Reckitt’s Enfamil baby formula. Several hundred similar claims have been in filed in US courts targeting Reckitt and Abbott.
"The more setbacks for either baby-formula maker, the more complicated it becomes for Reckitt to sell its nutrition arm. Reckitt last week indicated it might be up for sale, saying it was considering all options for the business.
"Any potential buyer could be put off by the possibility of liabilities from the court cases, meaning the pressure is growing for Reckitt to find a way to ring-fence a large amount of money in case it loses big time in the court battles."
Sentiment depressed
Barclays analyst Iain Simpson said in a research note that Friday’s ruling was “close to a worst-case scenario” for Reckitt, warning that it would be difficult for the company to separate itself from Mead Johnson via either a spin-off or an IPO.
David Hayes, an analyst with Jefferies, suggested the court ruling is “likely to depress sentiment on the risk for both cited defendants Reckitt and Abbott - in these claims”.
He added: “Reckitt’s share price we estimate is already discounting for c£3bn-$3.5bn of liability risk next year, but with its own new individual trial due to start on 30 September & MDL [multi-district litigation] class action gaining momentum, that risk may be extended this week we think.”
If Reckitt’s appeal against the March court ruling against it is successful, sentiment could change, but as things stand the company’s prospects of offloading Mead Johnson do not look promising.
Short of a fire sale of the nutrition division, which it should be pointed out generated sales of £1.17bn ($1.50bn) in H1, 2024, and has an offering much wider and more mainstream than premature baby infant-formula, it is likely to be a lengthy waiting game while the multitude of claims against it play out in the US courts.
