Primavera buys Reckitt’s China formula business for $2.2b

The transaction includes manufacturing plants in the Netherlands and China, as well as a royalty-free perpetual and exclusive license to the Mead Johnson and Enfa brands in China. Reckitt will retain an 8% interest in the China business. It expects the divestment to generate net cash proceeds of $1.3 billion. 

The deal continues a trend of China divestments by multinationals, many of them driven by a reluctance to deal with an increasingly complex market characterized by slower growth and rising domestic competition. Earlier this year, a Primavera-led consortium acquired a controlling position in recruitment website Zhaopin from Australia's Seek International for $1.7 billion. It was also involved in the spin-out of Yum China business, albeit as a minority investor.

Reckitt announced a strategic review of the business in February as part of a broader shift towards higher-growth brands and markets. Hygiene and health are its biggest revenue generators through brands such as Vanish, Harpic, Durex, Dettol, and Nurofen.

The company noted in its 2020 annual report that the operating environment for infant formula in China continues to be challenging. It blamed “declining birth rates, tougher regulations and increased local competition who have been investing heavily.” Reckitt claimed to compete effectively with fellow multinationals in the premium segment, but a slowing rate of premiumization – plus the rise of local brands – is expected to reduce growth opportunities in the near term.

Moreover, COVID-19 prompted a closure of the boundary with Hong Kong, severely limiting cross-border trade. Personal shipments of infant formula – referred to as the daigou channel – are sufficiently commonplace in normal circumstances that Hong Kong limits the number of cartons that can be carried into mainland China.

As of December 2020, Reckitt’s global infant formula and child nutrition assets totaled GBP8.8 billion ($12.5 billion), of which GBP3.4 billion was allocated to China. The China business generated GBP861 million in net revenue and GBP85 million in operating profit last year. This equates to 6% of Reckitt’s GPB14 billion in global revenue and 25% of the revenue for the nutrition division alone.

It is responsible for the marketing and distribution of Mead Johnson Nutrition and the family of Enfa brands in mainland China, Hong Kong, and Taiwan. There are approximately 3,000 employees, including those at the factories in the Netherlands and China.

Fred Hu, founder and chairman of Primavera, said in a statement that his firm looked forward to building on the heritage and strength of the Mead Johnson brand. “We have considerable experience investing and growing and expanding global brands in China,” he added.

Primavera is in the process of raising its fourth fund, which has a target of $4 billion. Fund III closed on $3.4 billion in late 2019. The firm has also launched a special purpose acquisition company (SPAC) to pursue global consumer companies with a significant China presence or compelling China potential.

Other notable recent divestments of consumer assets in China by multinationals include Carrefour selling its hypermarkets and convenience store business to Suning and Metro offloading a majority stake in its retail operation to Wumart. Ascendent Capital Partners committed $500 million to the combined Wumart-Metro entity, having advised on and helped finance the acquisition.

Much like the Primavera SPAC, local private equity firms are also targeting global consumer assets, in part with a view to supporting China expansion. Earlier this year, Hillhouse Capital bought the domestic appliances business of Netherlands-headquartered Philips for an enterprise value of EUR3.7 billion ($4.5 billion).

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• Topics
• Greater China
• Buyouts
• Consumer
• China
• Primavera