Reckitt Benckiser Reaches Deal to Acquire Mead Johnson

Reckitt to pay $90 cash for each share in a transaction valued at about $17.9 billion

UK-based Reckitt Benckiser Group PLC (RB), a leading consumer health and hygiene Company that owns global brands including Nurofen, Strepsils, Durex, Scholl, and Clearasil, has agreed to buy US-based infant formula maker Mead Johnson Nutrition Company (NYSE: MJN) for $16.6 billion, as reported by the Wall Street Journal on February 10th, 2017.

For RB, this represents the biggest deal ever that will almost double the size of its consumer health business and help it establish its presence in emerging markets, especially China. As a result of this transaction, Mead Johnson will become a new division under RB, with its globally recognized Enfamil and Nutramigen brands joining RB’s portfolio of leading consumer health brands.

Deal details

RB has agreed to pay $90 cash for each share of Mead Johnson’s common stock in a transaction valued at approximately $17.9 billion, which includes net debt of $1.2 billion as of December 31st, 2016. The price represents a premium of 29% to Mead Johnson’s closing price on February 01st, 2017. The total deal value of $17.9 billion represents a multiple of 17.4 times Mead Johnson’s 2016 non-GAAP EBITDA. The transaction has been unanimously approved by the Mead Johnson’s Board of Directors. The transaction is subject to customary closing conditions, including approval by shareholders of both Mead Johnson and RB and regulatory approvals, which is expected to occur in Q3 FY17. Mead Johnson will continue to pay its normal quarterly dividend until closing.

Kirkland & Ellis LLP acted as Mead Johnson’s legal advisor. Robey Warshaw, Bank of America Merrill Lynch, Deutsche Bank and HSBC advised Reckitt. Goldman Sachs Group Inc. (NYSE: GS) and Morgan Stanley (NYSE: MS) advised Mead Johnson on this deal.

The Glenview, Illinois-based Mead Johnson, a global leader in pediatric nutrition, develops, manufactures, markets and distributes more than 70 products in over 50 markets worldwide. The Company’s mission is to nourish the world’s children for the best start in life. The Mead Johnson name has been associated with science-based pediatric nutrition products for over 110 years. The Company’s Enfa family of brands, including Enfamil infant formula, is a world leading brand franchise in pediatric nutrition. According to FactSet, Mead had 6,800 employees on its rolls with 2016 revenue of $3.7 billion and a market capitalization of about $15.34 billion.

RB is the world’s leading consumer health and hygiene company. The Company has operations in over 60 countries, with headquarters in London, Dubai and Amsterdam, and sales in most countries across the globe. The Company employs approximately 37,000 people worldwide. RB’s Health, Hygiene and Home portfolio is led by its global Powerbrands including Nurofen, Strepsils, Gaviscon, Mucinex, Durex, Scholl, Clearasil, Lysol, Dettol, Veet, Harpic, Cillit Bang, Mortein, Finish, Vanish, Calgon, Air Wick, Woolite and French’s. Powerbrands represent 80% of RB’s net revenue.

For Q4 FY16, RB reported revenue of £2.76 billion, up 1% on a like-for-like basis. For the full year FY16, like-for-like revenue rose 3%. Reported EPS for the full year FY16 were 256.5 pence, up 6%, while net income rose 5% to £1.83 billion. RB reported a 1% like-for-like sales growth in Europe and North America, while emerging markets grew by over 8% during FY16.

RB’s CEO, Rakesh Kapoor stated:

“Mead Johnson’s geographic footprint significantly strengthens our position in developing markets, which account for approximately 40% of the combined group’s sales, with China becoming our second-largest “Powermarket”. We are confident that our deep understanding of consumer needs and our expertise in scaling global brands will deliver significant growth for the MJN portfolio. We will draw on the best of both businesses and continue to build on Mead Johnson’s extensive R&D, regulatory, quality and specialist distribution capabilities.”

Reckitt focuses on child nutrition as a growth opportunity

RB’s acquisition of Mead Johnson caps a years-long search by CEO Kapoor, who lost out to German drug and crop chemical maker Bayer AG in bidding for Merck & Co. Inc.’s (NYSE: MRK) consumer business in 2014. In recent years, Reckitt’s growth has slowed down, after which the Company has been pursuing growth opportunities to kickstart sales. RB said that organic revenue growth of just 3% for 2016, its weakest in over a decade. Sales were hit by a combination of factors including a failed foot-care innovation, a scandal in South Korea that led to its product being delisted, disruption in India after some high value bills were taken out of circulation. Reckitt forecasts 2017 like-for-like growth of 3%, which is far below analysts’ estimates.

RB said its goal is for the Mead Johnson business to perform at the upper end of estimated category growth of 3% to 5% per year in the medium to long-term. It estimates £200 million ($249.9 million) in annual cost savings by the end of the third full year and expects the acquisition to add to earnings in the first full year. RB also forecasts the Mead Johnson business to add a double-digit percentage rate to earnings by the third year.

Mead Johnson seen to be a strategic fit for Reckitt

Mead Johnson fits into Reckitt’s consumer health portfolio tangentially, just like its condom and foot-care brand acquisitions have in the past. RB has identified child nutrition as a growth opportunity, since the category is projected to grow sales by 3% to 5% over the medium to long-term. Mead Johnson reported net sales of $3.7 billion in 2016, down 8%. Half the Company’s sales came from Asia, with 17% coming from Latin America and the rest from North America and Europe.

The deal is seen to turn China into Reckitt’s second-biggest market, increasing its emerging-markets footprint by two-thirds. The deal will also significantly boost the Company’s exposure to the US, which remains its No. 1 market. Market experts also believe that the deal could raise Reckitt’s exposure to faster growing, higher margin categories in the long term, while Mead Johnson’s struggling performance lately made it a good time for an approach despite the pound’s decline following Brexit.

Stock Performance

Mead Johnson’s stock ended the day at $87.72, gaining 5.62%, at the close on Friday, February 10th, 2017, having vacillated between an intraday high of $87.84 and a low of $86.95 during the session. The stock’s trading volume was at 50,308,024 for the day. The Company’s market cap was at $16.18 billion as of Friday’s close.

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