Reckitt Benckiser CEO Rakesh Kapoor has a weakness for scribbling charts in meetings. A particular favorite of Kapoor shows the impact of consumer spending power on sales of the company’s homecare products.
While revenue keeps pace for a while with a rise in employment and wages, there is a point where the line flattens. There are only so many Air Wick room fresheners or tubs of Vanish stain-remover that one person can use.
By contrast, his line showing the effect of higher spending power on sales of consumer healthcare products — such as Reckitt’s Nurofen and Mucinex — just keeps rising, demonstrating something Kapoor describes as the “infinite potential” of this particular category of goods.
That is why he is interested in buying Pfizer’s consumer healthcare business (which makes Advil and Chapstick) if and when it comes up for sale, as reported by Bloomberg News. An aging population with an appetite for over-the-counter pills, vitamins and hemorrhoid cream is a lucrative prospect.
The interest in a large-scale merger and acquisition is also a tacit recognition that while the performance of Reckitt’s existing healthcare business has been stellar, homecare has been a bit flat: like that line on the chart. While it is hard to be too critical of a company with an industry-beating 24.5 percent operating margin last year, healthcare looks more likely to sustain that over the long term.
The homecare business did rally somewhat in the third quarter, with like-for-like sales up 5 percent, but it remains to be seen whether that continued for the rest of the year. Healthcare sales have increased at a steady clip of 13 or 14 percent year-on-year for every quarter this year.
Kapoor’s problem is that many of the best consumer healthcare brands are locked up in big pharmaceutical companies, part of the reason why the top 10 suppliers account for just 30 percent of the market. GlaxoSmithKline’s consumer joint venture with Novartis is another business that Reckitt eyes covetously.
Yet even if its patience pays off and Pfizer or GSK put the businesses on the block, there is nothing to suggest they will be cheap. To his credit, Kapoor pulled out of the bidding last year for Merck & Co’s consumer division. That was sold to Bayer at an eye-watering 7.5 times sales. Deborah Aitken of Bloomberg Intelligence says the expected norm for this type of deal would be about 5 times sales. Based on last year’s sales of US$3.4 billion, that would value Pfizer’s consumer business at US$17 billion.
There is no pressure on Kapoor to hurry a deal and there is an acknowledgement that the Pfizer assets may not become available for a couple of years. Reckitt has been strengthened by the relative weakness of US competitor Procter & Gamble, which has been locked in its own battle to revive growth.
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