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Mead Johnson Nutrition agrees Reckitt Benckiser takeover

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By Jim Cornall+

10-Feb-2017

Mead Johnson has agreed to a Reckitt Benckiser takeover deal.
Mead Johnson has agreed to a Reckitt Benckiser takeover deal.

Reckitt Benckiser Group plc (RB) has signed a merger agreement with Mead Johnson Nutrition Company (Mead Johnson) under which Mead Johnson shareholders will receive $90 in cash for each share of common stock, valuing the total equity at $16.6bn.

The terms are a premium of 29% on the closing price of Mead Johnson of $69.50 on 1 February 2017, before speculation of a possible transaction, and 24% to Mead Johnson’s 30‐ day volume‐weighted average price of $72.37 at the same date.

Including Mead Johnson’s net debt of $1.2bn as at 31 December 2016, the total enterprise value of the transaction is $17.9bn.

RB said the acquisition of Mead Johnson is aligned with RB’s strategic focus on growing in consumer health and on investing in ‘power brands.’

Mead Johnson’s global infant and children’s nutrition business is worth approximately $46bn in annual sales. RB expects the category to grow at approximately 3‐5% per annum in the medium to long term.

Increase in revenues

Rakesh Kapoor, CEO of RB, said the acquisition of Mead Johnson is a significant step forward in RB’s journey as a leader in consumer health.

“Mead Johnson’s geographic footprint significantly strengthens our position in developing markets, which will account for approximately 40% of the combined group’s sales, with China becoming our second largest Powermarket,” Kapoor said.

He added RB would deliver ‘significant growth’ for the Mead Johnson portfolio, and build on Mead Johnson’s extensive R&D, quality, regulatory and specialist distribution capabilities.

Mead Johnson’s infant and children’s nutrition business increases RB’s revenues in consumer health by approximately 90%, while its global Enfa franchise, which includes Enfamil, becomes RB’s largest ‘power brand.’

Mead Johnson’s portfolio saw approximately 80% of 2015 net sales from the Enfa family of brands and approximately 65% of 2015 net sales in three markets; China, the US and Mexico.  

In 2015, Mead Johnson had net sales of $1.2bn in China.

Kasper Jakobsen, Mead Johnson CEO, said the company will derive benefits from both increased scale and diversification.

Mead Johnson operated with an attractive gross margin of 64% and a non‐US GAAP operating margin of 25% in 2016.

Financial details

The goal, RB said, is for Mead Johnson to perform toward the upper end of the estimated category growth rates of 3‐5% per annum.

The integration of RB’s and Mead Johnson’s businesses is expected to deliver cost savings of £200m ($250m) per annum by the end of the third full year following completion.

Enfamil is one of Mead Johnson Nutrition's products.

These arise principally from removing duplication in back office functions and leveraging the enhanced scale of the combined business in the procurement of raw and packaging materials, advertising and promotional expenditure and other spend.

RB said the acquisition is expected to deliver a post‐tax return on invested capital in excess of RB’s cost of capital by year five.

Financing details

The acquisition will be financed through new fully underwritten debt facilities with Bank of America Merrill Lynch, Deutsche Bank and HSBC.

These facilities include $9bn of term loans over three to five years and $8bn of bridge funding to cover the cash consideration plus a further $3bn to refinance existing Mead Johnson bonds if required.

They also include an additional £1bn ($1.25bn) revolving credit facility to provide financing headroom from the date of completion. RB expects to refinance the bridge by the issuance of bonds to reflect the expected cash flows of the combined group.  

Integration

RB said it would establish an infant and children’s nutrition division, which will report directly to the RB CEO.

The company added it will “balance the opportunity to realize cost savings from back office and procurement, with the need to retain and invest in valuable talent at Mead Johnson, especially within the R&D, quality, regulatory and specialist distribution capabilities.”

Regulatory approval

Because of its size, the proposed acquisition constitutes a Class 1 transaction for RB under the UK Listing Rules and will therefore require the approval of RB’s shareholders.   

The acquisition is also subject to approval by shareholders of Mead Johnson, regulatory approvals (including in the US, China and other markets), and certain other customary conditions.

The transaction is expected to be completed by the end of Q3 2017.

Surprise at little overlap

Lianne van den Bos, senior analyst at Euromonitor International, said the takeover bid of Mead Johnson was surprising, as it signifies little overlap with their current business, but it hints at future growth strategies for the consumer packaged goods industry.

“Health nutrition is the way forward and marks many companies’ changing direction for growth, the latest examples being Danone and Nestlé,” van den Bos said.

“Yet for Reckitt Benckiser this marks a diversifying strategy of its product portfolio that already stretches between home care, consumer health and beauty and personal care. This is contrary to latest corporate strategies recognizing the need for specialization and shedding off brands that do not fit the core business.”

She added that with companies fixated on achieving high margins with baby food and increasing profitability, the move could pay off in the long run.

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