City & Business: Germ of a good idea

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The Independent Online
I HAVE spent much of the week immersing myself in Harpic, Dettol and Mr Sheen. The arcane world of household products is not the most enticing of industries. But Reckitt & Colman's decision to make one of the biggest acquisitions of the year, spending pounds 980m on the American group L & F Household, means I am not alone. Half the City is having to grapple with such delights as Love My Carpet rug deodoriser, Rid-X septic tank additive and Mop & Glo floor wax (three of the many brands in L & F's huge cupboard under the sink).

At first glance it seems an uninspired choice of acquisition. The household products sector, never glamorous at the best of times, has been dismal over the last couple of years. Margins have been squeezed. Demand is flat. Prices have been frozen or even reduced. And copycat own-label products continue to take market share.

But Reckitt's other product areas - food and pharmaceuticals - are no more enticing. As for diversification, it tried that before and it was a disaster. In the 1970s it went out on an insane buying spree, snapping up everything from a New Zealand jewellery business to a US embroidery kits company.

Buying L & F looks a picture of corporate wisdom by comparison. It may be dull, but it is comparatively low-risk. The price looks reasonable at twice annual sales. And the closure and redundancy expense of combining it with its existing US business should be more than repaid in cost savings within the first two years. To achieve the pounds 40m of planned savings, there are likely to be heavy job losses: one of the two US head offices will be closed; the sales forces combined; and some of the eight US plants shut down.

L & F has one jewel. Its Lysol range of disinfectants and cleaners is familiar to every American. It sells dollars 360m worth of Lysol products every year - half its entire sales. Two out of three American homes has a Lysol product. With Lysol, Reckitt believes it has the muscle to compete head-on in the US with giants such as Procter & Gamble and Colgate- Palmolive. Lysol will give Reckitt the clout to win shelf space in supermarkets and the increasingly important discount warehouse clubs.

Lysol's expertise in bacteriology and virology, Reckitt hopes, should also produce a germ-busting stream of new products. For new products, or at least fresh variants of old products, or at least differently packaged versions of old products, are the lifeblood of the household sector. Reckitt knows how to milk a brand for all its worth: after Dettol disinfectant came Dettol soap, Dettol shaving foam, Dettol acne cream, Dettol sticking plasters, even Dettol shower foam.

The City's response to the deal has been warm-ish, although the shares took a bit of a pasting. The company has done enough to ensure its pounds 230m rights issue is taken up. The decision to ditch the UK food business - Colman's mustard and Robinson's barley water - will be lamented only by sentimentalists and perhaps the Reckitt chairman, Sir Michael Colman (profiled on page 6).

There is one nagging doubt. Reckitt was sold a pig in a poke when it last went shopping, paying pounds 750m for another US firm, Boyle Midway, in 1990. Although Boyle delivered the necessary synergies, it turned out it had nothing in the all-important product pipeline. Reckitt had no access to Boyle's development plans before striking the deal.

This time round it is again flying blind. Vernon Sankey, chief executive now, but the man in charge of North America at the time of the Boyle deal, says L & F's track record is better and its laboratories seem well staffed. 'You can't guarantee it won't be the same as Boyle Midway, but I would be extremely surprised.' Fingers crossed, then.