Market shrugs at Durex owner Reckitt’s growth and simplification plan

Durex condom maker Reckitt Benckiser has pledged to sell off its home care and nutrition brands as part of a simplification drive, instead focusing on health and hygiene.

However, despite the radical nature of the plan, it seems as if investors have decided to wait and see what’s next rather than bidding up the stock. Reckitt shares jumped in early deals in London but have since given up all gains to trade flat.

Focusing on ‘powerbrands’, the company plans to sell off home care brands it no longer considers ‘core’, such as Cillit Bang, water softener Calgon, and air freshener Air Wick.

Its American infant formula business Mead Johnson is also set for the chopping block, with Reckitt saying it would “consider all strategic options”.

“Reckitt’s allocation framework remains constant, and these actions allow the company to focus capital against brands that offer the best long-term opportunity for growth,” the company said.

Instead, Reckitt will focus on its premium ‘powerbrands’, like Strepsils, Gaviscon, Nurofen, Lysol, Dettol and Vanish, as it said these brands have delivered strong growth and high margins, generating a seven per cent annual growth in revenue over the last five years.

It will also keep around “likely future powerbrands” including Move Free and Biofreeze, and important ‘local hero’ brands such as Lemsip, Airborne, KY, Veja, Jik, Tempra and Jontex, it added.

Durex owner embarks on cost cuts

The simplification of brands will be joined by a simplification of organisation, reducing management layers across the globe and moving to a “unified category structure” across North America, Europe and Emerging Markets, scrapping its Global Business Unit structure.

Reckitt estimated that the changes it has proposed will create a three per cent saving in fixed costs by 2027, though the restructuring will cost around £1bn.

The new organisational structure is set to come into place at the start of 2025.

Kris Licht, chief executive of Reckitt, said: “Today we announce an important step forward to firmly establish Reckitt as a world-class consumer health and hygiene company, with one of the strongest growth and margin profiles in the industry.

“Our core portfolio of market-leading Powerbrands and simpler, more effective organisation position us to better serve our consumers and customers. This will deliver attractive long-term value creation for Reckitt’s shareholders through our earnings model and cash returns.

“I am pleased to announce the appointment of a number of talented, long-term Reckitt leaders to the Group Executive Committee to deliver this growth and value creation opportunity.”

Alongside the restructuring announcement, the company also announced its results for the first half of 2024.

For the first six months of the year, the company reported like-for-like net revenue growth of 0.8 per cent on an adjusted basis.

The company announced an operating profit of £1.7bn, down 4.9 per cent and a decline in diluted earnings per share of -6.8 per cent.

Can Reckitt turn itself around?

Could the move to slim itself down be just what’s required to help Reckitt return to growth?

Analysts are positive about the move: “Selling off non-core brands and simplifying its management structure could lead to higher group profit margins,” AJ Bell investment analyst Dan Coatsworth said.

Activist investors are behind the turnaround, he added.

“The appearance of multiple activist investors on the shareholder register implies that serious conversations have been held behind closed doors… Reckitt is now giving its response, laying out intentions to be leaner and keener,” Pattinson said.

Activists owning the shares include Independent Franchise Partners, Asset Value Investors, Harris Associates and Franklin Mutual Advisers.

However, Mead Johnson may be a tough sell.

“With the NEC litigation ongoing, we wonder how much of a free agent Reckitt will prove to be if it looks to offload this business,” RBC analysts said.

“Our assumption is that the most likely outcome is that they will be sold… [but] if that’s the case, it would leave Reckitt with an inefficient balance sheet,” analysts added.

And questions are now being asked about the future of Reckitt itself.

“The focus now turns to whether Reckitt becomes a takeover target once it has completed the restructuring,” Pattinson said.

“Currently, prospective bidders might be put off by the potential liabilities linked to legal action around the safety of its baby formula products… Once there is clarity on this issue and the other non-core brands are sold, a more streamlined Reckitt would certainly look appealing to rivals, particularly if the share price stays at bargain basement levels,” he added.

“It’s almost certain that trade buyers or private equity have the stock on their radar,” Pattinson said.