MJN Mead Johnson Nutrition Company (delisted)

By Saabira Chaudhuri 

LONDON-- Reckitt Benckiser Group PLC on Friday said it agreed to buy baby-food maker Mead Johnson Nutrition Co. for $16.6 billion, a deal that will almost double the size of the British company's consumer-health business and help it push deeper into emerging markets.

The U.K. company, which owns Durex condoms and Scholl footcare, earlier this month disclosed that it was in talks with Mead after The Wall Street Journal reported on the potential deal. It will pay $90 a share in cash for the Glenview, Ill.-based company, which makes a range of nutritional products including Enfamil infant formula and the Sustagen milk supplement for children.

Including debt, the deal is valued at $17.9 billion.

The acquisition caps a yearslong search by Chief Executive Rakesh Kapoor, who lost out to Bayer AG in a bidding war for Merck & Co.'s consumer business in 2014, and has since been looking to do a big deal.

Reckitt's growth has slowed lately, leaving the Slough, England-based company in need of a new avenue to jump-start sales. Friday, the company reported organic revenue growth of just 3% for 2016, its weakest in over a decade. Sales have been hit by a string of issues lately, 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.

Shares rose as much as 2% in early trading in London but lately were down 0.8%. Reckitt on Friday forecast 2017 like-for-like growth of 3%, which is below analyst estimates.

Mr. Kapoor said Mead Johnson fits into Reckitt's consumer-health portfolio tangentially, just like its condom and foot-care brand acquisitions have in the past. "Our strategy is about healthier lives and homes," he said. "Their mission is about enabling healthier lives from the very beginning."

He identified child nutrition as a solid opportunity, saying the category is projected to grow sales by 3% to 5% over the medium to long term.

Mead 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 will 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 U.S., which remains its No. 1 market.

However, buying Mead won't necessarily be the silver bullet Reckitt is looking for.

Analysts have noted few obvious synergies between the two companies beyond some distribution and head-office cuts. "This deal does have elements of desperation about it," said Exane BNP Paribas analyst Jeff Stent following Reckitt's initial confirmation that it was in talks to buy Mead. "Mead has zero overlap with Reckitt."

The company said the Mead deal would boost per-share earnings by a double-digit percentage by the third year after closing, which Mr. Stent on Friday described as "very conservative," likely driven by low savings and the high cost of funding the deal. Reckitt forecast cost savings of GBP200 million ($249.9 million).

Still, investors had cheered the deal when initially announced, which could raise Reckitt's exposure to faster growing, higher margin categories in the long term, while Mead's struggling performance lately made it a good time for an approach despite the pound's decline following Brexit.

Mead's shares have fallen sharply in the past two years--as the company grappled with sluggish sales in its key Asia market--and were down 2.7% since the start of this year, before news of the deal broke.

"I don't think you should read too much into the timing," Mr. Kapoor told journalists on conference call, saying Reckitt had been looking at Mead and other companies "for a number of years."

Reckitt on Friday reported 1% like-for-like sales growth for 2016 in Europe and North America, and said emerging markets grew by over 8%. Net income rose 5% to GBP1.83 billion.

Robey Warshaw, Bank of America Merrill Lynch, Deutsche Bank and HSBC advised Reckitt. Goldman Sachs and Morgan Stanley advised Mead Johnson.

Tapan Panchal contributed to this article.

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com

(END) Dow Jones Newswires

February 10, 2017 08:07 ET (13:07 GMT)

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