UK-based consumer goods company, Reckitt Benckiser, maker of iconic products including Lysol cleaners, Nurofen tablets, Scholl foot products, and Durex condoms, has confirmed that it is engaged in advanced negotiations to acquire U.S.-based Mead Johnson Nutrition Co. for a total bid of $16.7 billion, or $90 per share in cash.
Reckitt Benckiser explained in a short statement that it plans to fund the pending acquisition through a combination of cash and debt, and that the two companies are “presently engaged in a period of due diligence and contract discussion.”
Since the global infant nutrition company, which controls the Enfamil and Nutramigen brands, went public in 2009, there has been widespread expectation of a takeover; however, Reckitt Benckiser is an unexpected bidder.
Bloomberg reports that Nestlé SA and Danone have been considered to be two of the most likely buyers, but timing is on Reckitt Benckiser’s side, as Danone is currently tied up in completing its acquisition of organic food company, WhilteWave for $10 billion, while Nestlé’s CEO has only been in place for a month, and would face significant push-back from antitrust regulators if it attempted a Mead Johnson takeover.
For Reckitt Benckiser, which has been open about the fact that it was looking for opportune acquisitions since Bayer beat out the company for the consumer healthcare unit of Merck in 2014, the deal would make it one of the top players in one of the most promising growth categories. The Telegraph reports that Mead Johnson holds approximately a 14 percent global share of the infant nutrition market, which is expected to increase in value from $53.3 billion in 2015 to $76.5 billion by 2021, according to Zion Market Research. This standing ranks Mead as the third largest player in the global infant formula sector behind Danone and Nestlé.
Much of this growth will be anchored in Asia, where infant formula is expected to be one of the fastest-growing food categories, according to Bloomberg. The supposition is that China’s two-child policy will likely drive up sales in that country, while more women entering the workforce across broader Southeast Asia will drive the market across the region.
Not only will the acquisition provide Reckitt Benckiser access to additional global markets, but it would also help resolve other challenges recently faced by the company, including counteracting the pressure its business units have been under in emerging markets. Soft demand in Russia has cut into profits, but more significant is the situation in South Korea, where one of Reckitt Benckiser’s executives was jailed for the sale of toxic disinfectants resulting in fatal lung injuries, reports the Financial Times. The resulting boycott of Reckitt Benckiser’s products, and £300 million (US$375 million) compensation payment, cut into the company’s third-quarter earnings and damaged its consumer relationship.
Reaction
Many analysts have expressed surprise by the bid, noting a lack of synergies, stating that the jump into infant nutrition is far outside Reckitt’s core portfolio of consumer health products. However, others point to this fact as being a boon — as it will mean minimal overlap and less antitrust issues — and are taking a more positive view.
“It’s a branded consumer proposition with healthcare-y attributes,” RBC Capital Markets analysts told CNBC, while UBS analyst, Pinar Ergun told the Telegraph, “Critics are likely to argue that Reckitt Benckiser is desperate to do deals, pointing out the scarcity of core health/hygiene assets on offer. We take a more balanced view: Reckitt Benckiser management’s strong track record in balancing growth/margins could go down well at Mead, and the long-term category dynamics are attractive.”
Meanwhile, moving into speculation, Bernstein analysts told Reuters that the acquisition of Mead could see Reckitt Benckiser follow through on the sale of its home and food businesses, which they estimated could sell for $10.2 billion. Only time will tell.
-Lynda Kiernan
Lynda Kiernan is Editor with GAI Media and daily contributor to GAI News. If you would like to submit a contribution for consideration please contact Ms. Kiernan at lkiernan@globalaginvesting.com