This article is provided to FT.com readers by dealReporter—a news service focused on providing insightful intelligence on event driven situations to investors. www.dealreporter.com
--------------------------------------------------------------------------------------------------------
Reckitt Benckiser is testing the waters of the capital markets ahead of what could be a transformational deal, though it does not appear to be one involving Colgate-Palmolive (NYSE: CL), several industry bankers familiar with the companies told this news service.
A Reckitt spokesperson said the UK-based consumer products company does not comment on market rumor or speculation.
A lender close to Reckitt said the company has been talking to lenders in the last two months and is testing the markets to see how much capital it can raise. If the company chose the bond market over bank debt, the lender indicated it could raise about USD 3bn to USD 4bn in unsecured debt. The lender added that cash-rich Reckitt can spend between USD 6bn and USD 7bn on an acquisition “without breaking into a sweat.”
An article published this week in the UK daily, The Telegraph, cited “well-placed” sources as saying that Reckitt is getting ready to execute on a multi-billion international deal, naming Colgate as a potential target.
The bankers were highly skeptical of Reckitt’s current ability to acquire the US company despite potentially “massive synergies” and indisputable logic behind the combination. The first banker noted that any deal between Reckitt and Colgate would have to be a merger-of-equals, since Reckitt does not possess the firepower to launch a hostile bid for Colgate, the number-one US household products company. The second banker acknowledged that Reckitt would be too small to take over Colgate.
But a merger between Reckitt and Colgate has been rumored for several years, the bankers said, questioning whether today’s press report held any more water than reports in recent years.
“It’s a complete step-change for [Reckitt]. No question they’re ready to do something, maybe the Colgate rumor could be a red herring,” said the first banker.
Being a significant buy for Reckitt, a third industry banker said Colgate would require almost too much cash, too much funding, and an abundance of stock. “That doesn’t mean it can’t be done,” the same banker said, noting that Reckitt would likely rather continue its path of advancing its presence within the Over-the-Counter (OTC) healthcare market.
In 2008, the company acquired Adams Respiratory Therapeutics, allowing it to enter the US OTC market with Mucinex, and in 2006, it acquired Boots Healthcare International for over GBP 1.9bn.
“Pretty much everyone on the street knows they want to spend some cash, another Boots-like deal: large, transformational likely in OTC healthcare,” the lender said
Commenting on the timing of a potential deal, the lender said it was not clear to him whether the company had already decided on a specific target. However, he believed Reckitt was “stretching before a big run.”
Reckitt’s leading prescription drug Subxone, a heroin-dependency treatment, went off patent in October, which heightened fears that the company could lose up to 80% of revenues, and profits to generic rivals in 2010. The third banker described it is a massive hit to sales and earnings, adding that Reckitt will need to replace it.
However, there was some skepticism around Reckitt acquiring Schering Plough’s OTC, two of the industry bankers said. The third banker said he personally did not believe Schering’s OTC unit was the greatest asset, due to products such as OTC allergy medication Claritin, which has reported declining sales. He did, however, mention that Dr. Scholls foot care products was one of the few strong businesses in the portfolio.
Reckitt has enjoyed an impressive performance in recent quarters, further fueling rumors of a potential M&A deal.
At the end of September 2009, its net debt stood at GBP 423m, with free cash flow before dividends running at over GBP 1.3bn during the 9m period, or 23% of sales.
--------------------------------------------------------------------------------------------------------
For more information or to inquire about a trial please email sales@dealreporter.com or call Europe/EEMEA: +44 (0)20 7059 6160 Americas: +1 212 686-3076 Asia-Pacific: +852 2158 9714
