Reckitt Benckiser has done spectacularly well in getting $4.2 billion for its unwanted foods business, whose three main brands are French’s mustard, Frank’s Red Hot sauces and Cattlemen’s barbecue sauces. These are probably not that familiar to British consumers, but they are big names in the United States, where the business has a headquarters in New Jersey and a manufacturing plant in Missouri.
North America apparently accounts for 30 per cent of global mustard sales. The buyer, therefore, is a US company, McCormick, probably best known here for last year’s tilt at Premier Foods, the Mr Kipling cakes business that has had its fair shares of woes in recent years. Some investors probably wish the offer had been successful.
As it is, McCormick will have to justify the high price it is paying, a consequence of strong demand for the foods business from the likes of Unilever and Hormal Foods, the American owner of Spam. Reckitt has had the business on the “sell” list since April and needs the cash to reduce the debt taken on with the $17.9 billion purchase of Mead Johnson, the maker of baby formula.
The sale will bring down borrowings from an uncomfortable three times earnings to a more manageable 2.3 times by the end of next year, analysts believe. McCormick is paying more than seven times annual sales for food and 20.4 times earnings, a higher multiple than the rest of Reckitt is trading on. By contrast, when the business first went up for sale estimates of its worth were only a bit in excess of £2 billion.
The disposal and that Mead Johnson purchase mean that Reckitt is now focussed on consumer health in its broadest sense and market-leading power brands such as Dettol, Lysol, Durex and Cillit Bang. This year was never going to be a stellar one for the company, which has previously seen annual growth in the 4 per cent to 5 per cent range, stripping out acquisitions.
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Reckitt had set a target of 3 per cent growth but conceded that the cyberattack on its facilities at the end of June and some changes to the tax regime in India would make 2 per cent more likely. The shares, up 125p at £79.37, trade on 23 times earnings, which suggests further immediate upside may be limited.
MY ADVICE Avoid
WHY The price gained for the food business is a huge coup for the board, but growth in the current year is expected to be muted
Severn Trent
Preparations for the next round of regulation for the water industry, which runs from 2020 to 2025, are well under way, and the question for investors is how much tougher the pricing regime will be and the extent to which companies that outperform will be able to pass on the fruits to them. For now, the dividend flow from the three quoted companies looks safe enough.
There is nothing in the latest trading statement from Severn Trent to upset those investors. Water companies are boringly predictable, which is why they can afford that solid dividend income. The company is on track for this year’s outperformance target. It has simplified the corporate structure with the sale of Italian and, most recently, North American businesses.
Severn Trent revamped its dividend policy with the latest results and has pledged to increase payments by inflation plus 4 per cent. This column has suggested before that it is worth buying such utilities on any weakness in the share price. Severn Trent, off 3p at £22.29, has fallen from more than £25 in May, but the yield is an underwhelming 3.9 per cent.
MY ADVICE Avoid
WHY Better income available elsewhere in sector
RPC Group
RPC’s decision to call a halt on further acquisitions, after more than 20 over the past few years, is probably just as well because if, as the company says, its shares are severely undervalued, it does not make a lot of sense to issue new ones at this level to pay for them. Instead, the packaging specialist is embarking on a share buyback programme, albeit a limited one of up to £100 million given its market capitalisation of about £3.5 billion.
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This is sending out a clear message to the bears that have savaged the share price since the start of the year. One fund manager, in particular, has questioned the cashflow that is coming in and whether the more recent acquisitions, which include the once-quoted British Polythene Industries and Global Closure Systems, the French bottle top maker, are performing as well as RPC says.
So the trading update that came at the annual meeting said that first-quarter revenues were “well ahead” of last year’s at £960 million (RPC does not normally give a figure for the first quarter), that margins and profits were ahead of management expectations and that cashflow “remains on track”. The shares, one of this column’s recommendations for this year at £10.65, had been as low as 720p last month and have continued their recovery since, adding another 37½p to 880p yesterday . They sell on a forward multiple of less than 13. If management’s reassurances are to be relied on, that feels too low and further recovery in the price can be expected.
MY ADVICE Buy
WHY The fall in the share price still looks overdone
And finally . . .
Someone else (along with Reckitt Benckiser) doing well out of selling unwanted businesses is TT Electronics, a former metalbasher now focused on more high-tech stuff. TT is receiving £118.8 million for its transportation sensing and control side. One broker had a value of £65 million on the business and the sale will leave the company with a £50 million cash balance to spend on acquisitions and a 9 per cent margin on the rest of the group. The market appproved of the deal, the shares rising by 12 per cent.