Reckitt Benckiser agrees $16.6bn deal for Mead Johnson

April 2017 | DEALFRONT | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

British consumer health and hygiene powerhouse Reckitt Benckiser announced that it is to acquire US baby formula manufacturer Mead Johnson in a deal worth $16.6bn.

According to a joint statement, Reckitt will pay $90 per share for the company, a 30 percent premium on Mead Johnson’s closing price on 1 February, the day before speculation around a potential deal began. The transaction also includes Mead Johnson’s outstanding net debt of $1.2bn; the total enterprise value of the deal is $17.9bn.

The parties expect the deal to close in the third quarter of 2017, pending shareholder approval and standard regulatory approvals. Mead Johnson’s board of directors has already ratified the deal. Reckitt will fund the acquisition through loans from its banks – Bank of America Merrill Lynch, Deutsche Bank and HSBC – and by selling bonds. Specifically, the company will take out a bridging loan of $8bn to cover the cash consideration and issue $9bn of new debt in the form of three- to five-year-term loans. The two companies have also noted that the deal will include a $480m break-fee if either company walks away, subject to certain conditions.

The deal for Mead Johnson will provide Reckitt with a timely boost in a number of key markets, including the US and Asia. The company’s second biggest market – China – will be significantly strengthened by the deal. Reckitt hopes to exploit changing consumer habits in China in light of the country’s decision to scrap its one child policy. In 2016, China’s birth rate was its highest in years, rising nearly 8 percent on 2015.

According to Reckitt, the deal will lift earnings per share by a double-digit percentage within three years, while generating annual cost savings of around $250m.

In a statement announcing the deal, Rakesh Kapoor, Reckitt’s chief executive, said: “The acquisition of Mead Johnson is a significant step forward in RB’s journey as a leader in consumer health. With the Enfa family of brands, the world’s leading franchise in infant and children’s nutrition, we will provide families with vital nutritional support. This is a natural extension to RB’s consumer health portfolio of Powerbrands which are already trusted by millions of mothers, reinforcing the importance of health and hygiene for their families.”

Mead Johnson had previously been tipped as a target for rival baby formula makers Danone and Nestle; however, Reckitt Benckiser was able to secure the deal, hopeful that the American business would be able to bolster its 12 percent share of the Chinese market.

The acquisition could also prove to be a much needed shot in the arm for Reckitt Benckiser, following a disappointing 2016. Reckitt’s profitability has been negatively impacted by a safety scandal in South Korea, slowing emerging markets, as well as weaker than expected fourth quarter 2016 due to declining sales in Europe and North America.

James Cornelius, chairman of Mead’s board of directors, said: “The agreement being announced today is about value creation. First and foremost, this transaction provides tremendous value to Mead Johnson Nutrition stockholders. Additionally, relative to the future growth and development of the Mead Johnson business, Reckitt Benckiser – with its strong financial base, broad global footprint, consumer branding expertise and dynamic business model – is an ideal partner.”

Reckitt Benckiser, which owns famous brands like Strepsils, Durex, Lysol, Dettol and many more, plans to add Mead Johnson’s global brands Enfamil and Nutramigen to a new division within the company’s portfolio.

The successful completion of the merger will lead to medium to long-term growth of 3 to 5 percent in the global infant and children’s nutrition category of Mead Johnson, which is currently worth approximately $46bn in annual sales.

Richard Summerfield