Reckitt Benkiser confirmed the City’s worst kept secret today by finally announcing the float of its pharma business.
The new firm, Indivior, will begin trading on December 23 if RB shareholders give the plan the go-ahead at a meeting on 11 December.
Reckitt investors will receive one Indivior share for every RB share they currently own in a deal that could value the pharma spin-off at up to £4bn (although most estimates seem to suggest £2.5bn as a more realistic price).
But where does this leave RB without its profitable pharma arm and how much will the company downsizing affect RB’s operations and share price? Despite the pharma division accounting for around one fifth of RB’s annual profits, the consensus view in the City seems to be that not only will the spin-off not weaken Reckitt, the more consumer-health focussed business could benefit from the divestment.
The currently named RB Pharmaceuticals recorded net revenues of £344m in the first half of this year at a profit margin of over 50% (52.3%). This is obviously not chump change, but it also only represents 7.4% of RB’s first half revenues of £4.66bn.
Notably RB’s consumer business has recently experience strong growth, while pharma has been struggling to sustain sales. Excluding the pharmaceutical division, RB grew revenues by 4% on a constant currency basis in the first half of the year, compared to an 8% constant currency revenues decrease in pharma.
In this sense the pharma business has been holding Reckitt back, rather than supporting it.
Bernstein analysts certainly think RB will benefit from the spin-off, writing: “Uncertainty surrounding the future of RB Pharma (RBP) has been a significant investment controversy weighing on RB’s stock for a number of years… Clarity on the future of RBP and the removal of its results from RB’s books, will finally allow management (and investors) to focus on RB’s core business, especially the strategic shift towards Consumer Health, which we also believe will be positive for the stock.”
The benefit of this clarity of purpose for both businesses was played up by RB’s management this morning. The company said in a statement: “The demerger is in the best interests of both RB and Indivior and will result in a stronger future for both RB and Indivior, with the boards of each company focused on developing their respective businesses into leaders in their specific sectors.
“In particular, the board of RB considers that the profile and potential risks and rewards of Indivior, as a speciality pharmaceuticals company, will be better understood as a standalone listed business.”
The spin-off is really the culmination of a wider strategic effort to focus RB more wholly on consumer health products and some sort of divestment (through sale, swap or float) of the pharma arm seemed inevitable from the start of RB’s “strategic review” of RB Pharmaceuticals in October 2013.
This remoulding process is now likely to intensify, with consumer health brand acquisitions looking likely – especially with around £3bn from the Indivior float burning a hole in RB’s pocket. The firm has already bought the K-Y brand of personal lubricants from Johnson & Johnson in March and further efforts to consolidate the fragmented global consumer health market could include targeted acquisitions from Merck, Pfizer and GlaxoSmithKline.
However, the transformation is also likely to see the sale of a number of non-core homecare and food brands – potentially including low-margin brands like Air Wick and Calgon.
Bernstein concludes: “We believe RB can deliver strong and consistent operating performance into the medium-term [and] that the finalisation of the spin of RBP (at a reasonable valuation) and further M&A in Consumer Health would be positive catalysts for the stock.”
The broker has an outperform rating on the stock with a price target of 5,450p – RB currently trades at 5,322p and has risen by 11.1% so far this year.