Reckitt finalises deal to buy Mead Johnson for $16.6bn

Reckitt Benckiser has agreed to buy US baby formula maker Mead Johnson Nutrition for $16.6bn, giving the British consumer goods company a new product line and expanding its presence in developing markets.Reckitt, the maker of Lysol cleaners and Mucinex cold medicine, said yesterday it will pay $90 in cash for Mead Johnson shares, a 30% 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 $17.9bn 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.The company also forecast 2017 sales growth below some analyst estimates, citing the ongoing impact of those issues and a challenging macroeconomic backdrop.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 in 2009.Mead has long been seen as a potential takeover target for Danone or Nestle, 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. 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.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% 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 £200mn 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 $31.7mn if they were let go within two years of a takeover.Reckitt’s fourth-quarter revenue was £2.76bn, up 1% on a like-for-like basis, it said yesterday.Several analysts said the consensus was for growth of 1.7%.For the full year, like-for-like revenue rose 3% and reported earnings climbed 6% to 256.5 pence per share.Reckitt forecast like-for-like sales growth of 3% 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.