Reckitt finalizes deal to
buy Mead Johnson for $16.6 billion
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[February 11, 2017]
By Martinne Geller
(Reuters) - Reckitt Benckiser <RB.L> has
agreed to buy U.S. baby formula maker Mead Johnson Nutrition <MJN.N> for
$16.6 billion, giving the British consumer goods company a new product
line and expanding its presence in developing markets.
Reckitt, the maker of Lysol cleaners, Durex condoms and Mucinex cold
medicine, said on Friday it will pay $90 in cash for Mead Johnson
shares, a 30 percent premium to their close on Wednesday last week, the
day before Reckitt said it was in advanced talks with the maker of
Enfamil baby formula.
Including Mead Johnson's debt, the deal is worth $17.9 billion and
Reckitt Benckiser said it would finance the acquisition with debt
underwritten by Bank of America Merrill Lynch, Deutsche Bank and HSBC.
Reckitt - whose business has been hurt by a safety scandal in South
Korea, slowing emerging markets and a "failed" Scholl product - also
reported weaker than expected sales in the fourth quarter due to
declines in Europe and North America.
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The company also forecast 2017 sales growth below some analyst
estimates, citing the ongoing impact of those issues and a challenging
macroeconomic backdrop.
Reckitt's shares were down 2 percent at 1542 GMT in London, while Mead
Johnson was up 5 percent at $87.2 in New York.
INFLECTION POINT
Reckitt Chief Executive Rakesh Kapoor said the deal was "a significant
inflection point" for the company, as its biggest acquisition will
nearly double the size of Reckitt's faster-growing consumer health
business and expand its developing market presence by two-thirds.
China will become Reckitt's second-largest market behind the United
States following the acquisition of Mead Johnson, which was spun off
from Bristol-Myers Squibb <BMY.N> in 2009.
Mead has long been seen as a potential takeover target for Danone
<DANO.PA> or Nestle <NESN.S>, but not Reckitt, since the British company
has never been in the baby formula market.
"You might be surprised but we are absolutely not surprised. We've been
looking at this for a number of years now as we have indeed other
companies," Kapoor told reporters.
Still, analysts saw the choice of Mead Johnson as proof that other, more
obvious deals were unavailable in areas Reckitt has been targeting such
as over-the-counter medicines.
"The deal would seem to tick the 'financial logic' rather better than
the 'strategic logic', but opens up a lot of opportunities in a very
attractive category," said analysts at Credit Suisse.
Mead Johnson's shares had fallen by a third over the past two years, as
it has lost market share in China due to increased competition and
changing consumer habits.
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![](../images/021117pics/busine85.jpg)
Mead Johnson's product Enfamil baby formula are displayed on a store
shelf in New York City, U.S., February 10, 2017. REUTERS/Brendan
McDermid
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Steve Clayton, manager of the HL Select UK Shares fund at Hargreaves Lansdown,
which owns shares of Reckitt, said the poor performance was a risk.
"But building brands and raising performance is stock-in-trade for RB, and the
growth potential for infant milk sales is exciting, especially in the emerging
markets," Clayton said.
EARNINGS BOOST
Reckitt said its goal was for the Mead business to perform at the upper end of
an estimated annual sector growth rate of 3 to 5 percent in the medium to long
term.
The deal should add to Reckitt's earnings in the first full year after
completion and by the third year it is expected to boost earnings per share by a
double-digit percentage, with 200 million pounds of annual cost savings.
Kapoor said there been no talks yet about job losses at the combined businesses
and no decision had been taken regarding six Mead Johnson executives, who would
be owed a total of $31.7 million if they were let go within two years of a
takeover.
Reckitt's fourth-quarter revenue was 2.76 billion pounds, up 1 percent on a
like-for-like basis, it said on Friday. Several analysts said the consensus was
for growth of 1.7 percent.
For the full year, like-for-like revenue rose 3 percent and reported earnings
climbed 6 percent to 256.5 pence per share.
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Reckitt forecast like-for-like sales growth of 3 percent on a stand-alone basis
for 2017, below analyst expectations, and reiterated a medium-term target of
"moderate" margin expansion.
The company said the issues that hurt it in 2016 would persist into the first
half of 2017.
Subject to shareholder and regulatory approvals, Reckitt expects the Mead
Johnson deal to close by the end of the third quarter. The British company said
it expected to retain a strong investment grade credit rating following the
deal.
Robey Warshaw and Bank of America Merrill Lynch were Reckitt's lead financial
advisers, while Deutsche Bank was a financial adviser, corporate broker and
sponsor. HSBC was also an adviser to Reckitt. Mead Johnson was advised by Morgan
Stanley and Goldman Sachs.
(Additional reporting by Pamela Barbaglia)
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