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Reckitt writes off £10 billion from Rakesh Kapoor’s £13 billion Mead acquisition

·3-min read
<p>Rakesh Kapoor earned £97.5 million </p> (REUTERS)

Rakesh Kapoor earned £97.5 million

(REUTERS)

Has there ever been a more value-destructive UK takeover?

Rakesh Kapoor spent £13 billion to buy baby milk group Mead Johnson for Reckitts in 2017.

Just four years on, the company has been forced to slash £10 billion from the value of the business, which Kapoor said at the time would spearhead the group’s growth in consumer brands, particularly China.

Outside the mining industry (remember Rio Tinto’s $30 billion writedown on Alcan?), you have to look pretty hard to top that.

Mead was particularly big in baby milk.

But, as many of us pointed out at the time of the deal, Chinese demand for baby milk had long been questionable. Mead’s own sales figures showed revenues down 5% in Asia that year, even as rivals Nestle and Danone were flat.

That underperformance could have told you the thing was cursed - an issue proved a year later by a disastrous production outage at its Dutch baby formula plant.

Factory problems could be a one-off that no amount of due diligence could foresee, but falling birth rates in China had long been known about.

On top of increased competition, that was one reason why nobody but Reckitt’s would buy Mead in the first place.

Bankers say the likes of Danone were already quietly pondering an exit from Chinese baby milk and Mead had been unsuccessfully fished around the market until Kapoor decided to bite.

Kapoor’s successor-CEO Laxman Narasimhan has spent much of his time since taking over in 2019 clearing up the mess.

In Spring, he put his Mead China milk inheritance up for review and, over the weekend, found a buyer in private equity group Primavera.

In so doing, he will book a loss of £2.5 billion on the deal as he slashes the business’s value on Reckitt’s books. That followed £8 billion of previous writedowns on the business.

Yet, despite leaving such a legacy, Kapoor gets to keep every penny of the £97.5 million he was paid in his tenure as chief executive.

Reckitt, like all big companies, has the ability to “claw back” bonuses paid out to directors.

Its annual report says this can be done in the event of “gross misconduct, a material misstatement or... corporate failure.”

Spectacularly bad judgement doesn’t appear anywhere in the list.

Frustratingly, it probably shouldn’t.

Proving such a thing would only serve the lawyers who’d wrap companies and directors up in years of litigation.

Kapoor could doubtless come up with a dozen reasons why Mead looked like a great idea at the time and would probably win if it ever got to the High Court.

So, what lessons can we learn from his legacy?

Primarily, that shareholders should be extremely wary of CEOs who, when organic growth is flagging, suddenly embark on a massive acquisition.

Mead was Reckitt’s biggest takeover ever, in a business in which it had no experience and was the weakest in its peer group.

The red flags were flying: shareholders who missed them only have themselves to blame.

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