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Mead Johnson to be Bought by Reckitt for $16.6 billion

Mead Johnson to be Bought by Reckitt for $16.6 billion
The British consumer goods company Reckitt Benckiser would stand to gain a new product line and expanding its presence in developing markets as it has agreed to buy U.S. baby formula maker Mead Johnson Nutrition for $16.6 billion.
Reckitt will pay $90 in cash for Mead Johnson shares, a 30 percent premium to their close on Wednesday last week, the company said on Friday. The announcement was made on the day before it was announced that the company was in advanced talks with the maker of Enfamil baby formula. Reckitt is the maker of Lysol cleaners, Durex condoms and Mucinex cold medicine.
Reckitt Benckiser said it would finance the acquisition with debt underwritten by Bank of America Merrill Lynch, Deutsche Bank and HSBC and the deal would including Mead Johnson's debt and is worth $17.9 billion.
Weaker than expected sales in the fourth quarter due to declines in Europe and North America was reported by Reckitt whose business has been hurt by a safety scandal in South Korea, slowing emerging markets and a "failed" Scholl product.
Citing the ongoing impact of those issues and a challenging macroeconomic backdrop, the company also forecast 2017 sales growth below some analyst estimates.
Since 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, the deal was "a significant inflection point" for the company, Reckitt Chief Executive Rakesh Kapoor said.
Following the acquisition of Mead Johnson, which was spun off from Bristol-Myers Squibb in 2009, China will become Reckitt's second-largest market behind the United States.
But since the British company has never been in the baby formula market, Mead has long been seen as a potential takeover target for Danone or Nestle, but not Reckitt.
"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.
Other and more obvious deals were unavailable in areas Reckitt has been targeting such as over-the-counter medicines and this was the reason for choice of Mead Johnson, analysts say.
"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.
As it has lost market share in China due to increased competition and changing consumer habits, Mead Johnson's shares had fallen by a third over the past two years.
he poor performance was a risk said Steve Clayton, manager of the HL Select UK Shares fund at Hargreaves Lansdown, which owns shares of Reckitt.
"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.
In the medium to long term, performing at the upper end of an estimated annual sector growth rate of 3 to 5 percent was its aim for Mead business, Reckitt said.
By the third year it is expected to boost earnings per share by a double-digit percentage, with 200 million pounds of annual cost savings, from the deal and it should add to Reckitt's earnings in the first full year after completion.

Christopher J. Mitchell

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