Reckitt Benckiser Group PLC's (LSE:RKT, ETR:3RB) shares continue to suffer amid a series of legal challenges related to its baby formula products.
The company is facing litigation and significant financial penalties due to allegations surrounding the safety and marketing of its infant nutrition products.
Last week, the maker of Enfamil was ordered by a US judge to pay $60 million to a mother whose baby passed away, allegedly due to complications from consuming the formula.
Though Reckitt is appealing, and stated that “we do not believe that the plaintiff provided any evidence of causation with respect to the warning or any safety issue”, shares in the FTSE 100 constituent have flopped more than 15% in a week.
Reckitt also conceded that more legal cases relating to Enfamil are likely on the way.
Commenting on the matter, Barclays noted that, in its investor call, Reckitt highlighted that all cases named Reckitt’s subsidiary Mead Johnson as a defendant, not the wider Reckitt group.
The bank suggested that spinning out Mead Johnson could be an option down the line.
“We are unaware of what cross indemnities exist, but spinning out Mead Johnson as a separately and presumably US-listed infant formula company, potentially with Reckitt retaining a minority stake, might be one possibility to de-consolidate liability,” said Barclays.
“Given the cash-generating power of Mead Johnson, it should be able to settle and pay claims as a stand-alone.”
Citi's commentary suggests that the $7 billion market cap decline Reckitt experienced was perhaps an overreaction, with a more accurate liability estimate ranging from $2.5 to $7.5 billion.
”While this suggests Friday's reaction was overdone, (the) catalyst path remains complicated with a likely weak Q1 and the market putting a sticky liability discount,” said City.
Beyond the first quarter, Citi suggested that the risk/reward “could turn more favourable” as the valuation discount is likely to have overshot the liability overhang.
At the time of writing, Reckitt shares were trading at 4,370p with a £32.5 billion market capitalisation.