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Reckitt Benckiser has agreed to sell its infant formula business in China to private equity firm Spring as it seeks to end its struggle with a division that has weighed on its growth for years.
The deal values the unit at $ 2.2 billion. The UK-based consumer goods company expects to receive about $ 1.3 billion in cash from the transaction, which it will use to pay off debts, and maintain an 8% stake in the unit, it said in a statement on Saturday.
The deal will help Reckitt “rejuvenate growth and create long-term value,” its chief executive Laxman Narasimhan said in a statement, adding that the group is “actively and decisively managing our portfolio.”
Reckitt entered the baby formula business in 2017 when he bought US baby milk group Mead Johnson on a £ 13bn deal, which was part of a push by the former chief executive Rakesh Kapoor to refocus the company on top margin consumer health products. The unit manufactures brands such as Enfamil.
However, it has since struggled, in part due to falling Chinese birth rates and local competition.
Last year, Reckitt suffered a £ 5bn impairment in the acquisition of Mead Johnson, nullifying almost a third of its previous book value.
In 2018, a production shutdown at the Dutch infant formula factory left Reckitt unable to meet customer demand, removing £ 70 million from the company’s revenue and reaching the share price.
Martin Deboo, an analyst at Jefferies, said in March that he thought Reckitt shareholders “would be happy to leave [of the China baby formula business] at almost any price ”.
Reckitt expects a net loss of about £ 2.5bn as a result of the sale in the spring as it re-measures goodwill and the unit’s intangible assets, he added.
The company’s baby formula division as a whole reported a 7.4% decline in sales in the first quarter of 2021, compared to a year earlier.
Under the agreement, Spring, which has previously invested in Alibaba, Ant Group and ByteDance, will take control of Reckitt’s manufacturing plants in the Dutch city of Nijmegen and Guangzhou in China.
Reckitt will continue to own the Mead Johnson and Enfa brands, but Primavera will have a permanent license with no rights to use them in China.
Narasimhan, who took over in 2019, has been trying to turn around the performance of Reckitt, who had suffered towards the end of Kapoor’s tenure.
Its similar revenues rose 4.1% in the first quarter of this year, it said in April, as sales of hygiene products such as Lysol disinfectant soared.
Narasimhan said Reckitt was eager to grow his other business in China, the largest market for his Durex condoms.
Fred Hu, founder and president of Spring, said the deal would lead to a “strong collaboration” with Reckitt.
The Guangzhou-based baby formula business in China employs about 3,000 people and grossed £ 861 million between December and December.
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