Enfamil Courtesy of Mead Johnson

Mead Johnson's portfolio includes Enfamil products.

Reckitt Targets Mead Johnson with Surprise $16.7 Billion Bid

Speculation of a bid for Mead Johnson has been rife since the maker of Enfamil went public in 2009, though Nestle SA and Danone have been considered the most likely buyers.

Reckitt Benckiser Group Plc (IW 1000/300) emerged as a surprise suitor for perennial bid candidate  Mead Johnson Nutrition Co. (IW 500/226), starting talks on a $16.7 billion purchase of the baby food maker to build its faster growing consumer-health business and bolster its presence in Asia.

The maker of Lysol cleaners said late Wednesday it’s in advanced negotiations to acquire the U.S. company for $90 a share in cash in what would be the second-biggest acquisition by a U.K. company since the Brexit vote. Mead Johnson soared 24% to $86 in after-hours trading in the U.S., while Reckitt Benckiser shares rose as much as 5.3% in London.

Speculation of a bid for Mead Johnson has been rife since the maker of Enfamil went public in 2009, though Nestle SA and French yogurt maker Danone have been considered the most likely buyers. Reckitt Benckiser Chief Executive Officer Rakesh Kapoor is striking as Danone is busy trying to complete its $10 billion acquisition of organic food maker WhiteWave Foods Co. Nestle, whose new CEO just started last month, would face too many antitrust obstacles in such a transaction, analysts at RBC Europe have said.

Surprising Bid

“Reckitt Benckiser had never even been considered as a potential acquirer,” Andrew Wood, an analyst at Sanford C. Bernstein, said in a note. “Infant formula was considered too far away from its core business. Hence the news was very surprising to us.”

The acquisition would let Reckitt Benckiser add formula to a portfolio of consumer brands that include Nurofen painkillers, Strepsils throat lozenges and French’s mustard. The company has proven able to enter and thrive in new categories before, as it did when it acquired Durex condom maker SSL International Plc in 2010. And it already has a toe in the nutrition business from its 2012 purchase of Schiff Nutrition, which makes Omega-3 supplements and joint-pain pills.

Up until now, Kapoor has turned more to over-the-counter health brands such as Mucinex and Scholl for growth, with the home and personal-care divisions expanding more slowly. Hygiene represents about 40% of Reckitt Benckiser’s sales, compared with 33% for health. More recently, the company has been grappling with slowing growth in emerging markets and fallout from the sale of toxic disinfectant products in South Korea.

“Reckitt’s portfolio exposure to health, hygiene and home products presents a much cleaner takeout scenario when compared to antitrust issues which may otherwise arise in the case of a bid by a pure competitor to Mead,” wrote John Baumgartner, an analyst at Wells Fargo.

The offer price is 29% above Mead’s last closing price and values the target at 17 times earnings compared with multiples of 20 that Nestle paid for Pfizer’s baby-formula unit in 2012 and 22 that Danone paid for baby-food maker Numico in 2007, Baumgartner said.

Shares of Glenview, Ill.-based Mead Johnson had fallen about 34% from their 2015 peak, hurt in part by a resurgence in interest in breastfeeding in countries such as China. With a 10% share of the baby-food market, the company trails Nestle and Danone globally, though it’s second only to Nestle in Asia, the biggest market.

Baby food will likely be one of Asia’s fastest-growing food categories, even as the industry contends with near-term headwinds, Bloomberg Intelligence noted in December.

The category’s growth in China might be hurt by smaller baby-food makers slashing prices over the coming year, according to the note. Over the long term, China’s two-child policy is set to increase spending on formula, while demand in Southeast Asian countries including Indonesia and Vietnam is also likely to climb as more women enter the workforce.

The acquisition would be Reckitt Benckiser’s biggest ever, surpassing its 2.5 billion-pound (US$3.2 billion) purchase of SSL, according to data compiled by Bloomberg. The only bigger transaction since the Brexit vote was British American Tobacco Plc’s $47 billion offer for the 58% of Reynolds American Inc. that it doesn’t already own.

Reckitt Benckiser, based in Slough, England, would finance the deal with cash and debt. Mead Johnson confirmed the discussions in a separate statement, and both companies said there is no certainty that any transaction will ultimately be agreed on.

By Thomas Mulier and Paul Jarvis

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