The Lex Newsletter: Doing the splits

By News Room On Mar 20, 2024

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Dear reader,

Companies and sectors on the up tend to generate work for M&A bankers as they expand, reshape and acquire. Corporate crises, however, do the same — as bad deals of the past must be unwound or as the merits of diversification get shot down by a preference for streamlining and focus.

Europe has provided several examples in recent weeks, from companies in various stages of trouble. Lex has been following the travails of Bayer and the fallout from its disastrous acquisition of Monsanto in 2016. (You can read here why Lex thinks this will ultimately end in a break-up and more here on why the company’s restructuring efforts to date fall short). This is some of the recent Lex output:

UK-listed Reckitt has a deal disaster on its hands. Rather like Bayer’s woes related to its glyphosate herbicide, the deal to buy Mead Johnson in 2017 looks set to result in unquantifiable litigation risk for the consumer group. Its shares collapsed this week after an Illinois court awarded $60mn in damages to a mother whose child died after consuming Enfamil baby formula. Reckitt believes it has strong grounds to overturn the verdict. Still, the situation will pile pressure on the company to rethink its strategy after a series of mis-steps. Of course, given the litigation overhang, all options have become decidedly harder. Read more here.
Another day, another underperforming UK-listed consumer company. Unilever’s new boss Hein Schumacher is swearing off the sweet treats, pledging to demerge its ice cream business as part of slimming down its bloated corporate footprint. This didn’t look like the type of neat bit of restructuring that would manage to deliver a quick valuation uplift, said Lex. In fact, the logic for the separation, regarding the benefits of keeping differing consumer lines together and the need for management to focus on growth in stronger units, may prompt further questions about why Unilever’s remaining operations belong under the same roof. Get a scoop here.
Teaming up is another option when finding yourself in a squeeze. And that is what Nissan and Honda, traditionally arch-rivals in the Japanese automotive market, are doing. Outgunned by market leader Toyota at home, and increasingly threatened by affordable Chinese electric vehicles, the pair will need all the help they can get on both fronts. Japan’s automakers still have a stranglehold on the local market, where the sales share of battery electric vehicles is still slim at 2 per cent. But that just leaves ample room for lower-priced Chinese vehicles. Read more here.
As the US election approaches, there is more and more attention on why the buoyant state of America’s economy isn’t translating into a more favourable outlook for Joe Biden in the White House. Lex this week looked at two markets where the strains on the average US consumer are showing. America’s dollar stores, which historically did well when times were tough, are struggling: their fortunes in recent years have been determined by which particular strata or low-income consumer they serve. Meanwhile, there are signs of trouble in US credit cards, where delinquency rates have surged. However, the share prices of the credit card companies tell you that not all card companies will be affected equally. Read more here.
From one highly regulated market to another — at least if the UK government has its way. Lex looked at what the new English football regulator might achieve this week. The body, which looks destined to act as a lightning rod for all sorts of angst about the beautiful game, may keep some riff-raff out of management or stop rogue owners changing a team’s colours. But it looks unlikely to be able to regulate clubs into the black consistently. Nor will it be able to change the basic financial structure of the game. Lex kicked off here.

Quick links

Lex’s best-read piece of the last week: why hot rock batteries are coming to Europe soon
The UK government wants more institutional money to flow into small and unlisted companies. Those businesses will need to up their game on diversity then.
Not so long ago, companies were falling over themselves to commit to carbon reduction targets. Now, they are jamming the door on the way out.

Have a great week,

Helen Thomas
Head of Lex

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