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Quantifying litigation liabilities is a mug’s game. In some cases, initial fears turn out to be overblown. At the other end of the spectrum, Bayer has so far paid $20bn for lawsuits related to its acquisition of Monsanto and the allegedly carcinogenic properties of its glyphosate herbicide.
Reckitt investors will be pondering this dispersion as they prepare to do some litigation maths following another ill-judged acquisition. An Illinois court on Friday awarded $60mn in damages to a mother whose child died after consuming Enfamil baby formula. Reckitt acquired Enfamil when it bought Mead Johnson in 2017 for $18bn in including debt. The judgment has wiped £5bn — or some 13 per cent — off the group’s market value.
It is not hard to see why. While this was a standalone case, a broader multi-district litigation action involves around 400 plaintiffs. On top of that, up to 9,000 preterm babies contract necrotic enterocolitis every year in the US. Many are formula-fed, and the fatality rate is high. That adds up to a lot of potential plaintiffs.
Yet Reckitt — which believes it has strong grounds to overturn this verdict upon appeal — warns against extrapolating overall potential liabilities from the size of one outcome. Sell-side analysts are positing individual settlements ranging from the hundreds of thousands to low single-digit millions per plaintiff, implying a maximum liability in the £2-7bn range for the company.
Regardless of how it shakes out, Reckitt’s baby formula woes will pile pressure on the company to rethink its strategy, especially once Sir Jeremy Darroch takes the chair in May. This is just the latest in a long series of mis-steps which have led to disgruntled investors and a distinctly depressed valuation.
With an enterprise value of £40bn, Reckitt is worth a lot less than the sum of its parts. At the top of a valuation range, the group’s infant nutrition and health businesses alone might be worth £40bn, estimates Barclays. In such a scenario, investors would be getting the home and hygiene arm’s £1.5bn of ebitda for free.
Yet Friday’s verdict puts the group in a tough spot. Reckitt, which was rumoured to be considering a sale of its infant nutrition business in 2022, would probably struggle to find willing buyers for it today. Similarly, selling the valuable health business would risk leaving shareholders with wads of cash and an unattractive rump. A spin-off may be the best option left to unwind the problematic deal. While the share price fall makes a break-up more attractive, it also becomes harder to execute.
