Danone Swallowing Mead Johnson Would Challenge Nestle: Real M&A

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April 1 (Bloomberg) — Buying Mead Johnson Nutrition Co. is one way for Danone to break Nestle SA’s lock on the baby-food industry.

Danone could help finance a purchase with proceeds from shedding its medical nutrition unit, said Credit Suisse Group AG. The $45 billion company is weighing a sale of the business in a deal that may bring in more than 3 billion euros ($4.1 billion), according to a person familiar with the matter. Nestle bought Pfizer Inc.’s baby nutrition division in 2012.

Earnings at Danone, a distant second to Nestle in baby food, dropped 15 percent last year as a botulism scare hurt formula sales in Asia. The company’s struggles may increase its interest in Mead Johnson, which has boosted revenue almost 50 percent since its 2009 spinoff from Bristol-Myers Squibb Co., said Berenberg Bank. Mead Johnson, which has been speculated as a target since the spinoff, may cost about 15 billion euros, said Jefferies Group LLC.

While a deal would be expensive, “Mead Johnson would be a very good buy,” Ingrid Yin, a New York-based analyst at Oppenheimer Holdings Inc., said in a phone interview. “It’s a pure play. All their focus is on infant and children nutrition. It can be attractive in many companies’ eyes.”

Representatives for Mead Johnson, the $17 billion company based in Glenview, Illinois, and Paris-based Danone declined to comment.

Cash Proceeds

Danone is working with JPMorgan Chase & Co. on a potential sale of its medical nutrition unit, a person familiar with the matter said in February, asking not to be identified because the talks are private. The division, which sells Fortimel supplements to treat malnutrition, was acquired as part of a takeover of Royal Numico NV that also gave Danone brands including Nutricia and Cow & Gate.

A price tag of more than $5 billion is possible for the medical nutrition unit, according to Alex Molloy, a London-based analyst at Credit Suisse. Should Danone sell it, one use for the cash is investing in its baby division with a bid for Mead Johnson, Molloy wrote in a March 26 report.

“It makes sense to us that the division would be Danone’s investment priority,” the analyst wrote. “Having missed out on Wyeth, Mead Johnson represents one of the few remaining opportunities for Danone to challenge Nestle for global leadership of the infant nutrition category.”

Top Seller

Nestle edged out Danone to acquire Pfizer’s Wyeth baby-food business in 2012 and increase its lead as the top seller of infant nutrition products. Its offer of $11.9 billion topped a bid of more than $11.6 billion from the world’s largest yogurt maker, a person familiar with the matter said at the time.

Before that deal, Mead Johnson was speculated as a potential target for Nestle, Danone and H.J. Heinz Co. In September 2009, Danone denied a report that it was weighing a bid for the maker of Enfamil baby formula.

Danone may be more keen on a deal for Mead Johnson now, said James Targett of Berenberg. The yogurt maker’s sales are poised to grow by about 1 percent this year, the worst since 2009, according to data compiled by Bloomberg. Mead Johnson’s revenue will increase 24 percent over the next three years, according to analysts’ estimates compiled by Bloomberg.

“It’s an even more compelling strategic rationale than it was,” Targett, a London-based analyst at Berenberg, said in a phone interview. “I think ultimately it comes down to if they can afford it.”

‘Good Growth’

Buying Mead Johnson would give Danone more of a presence in the U.S. baby-food market and bolster its position in China, where sales have been pressured after a supplier warned of botulism-causing bacteria in milk powders, spurring a recall, said Amit Sharma, a New York-based analyst at Bank of Montreal. The scare turned out to be a false alarm.

“You can see why it would be appealing for Danone to acquire a very large baby-food business,” Sharma said in a phone interview. “It gives them good growth.”

The challenge will be convincing Chinese regulators to approve a deal, the analyst said. Regulators probably wouldn’t support “too much consolidation in the hands of some producers, especially in China where everybody is trying to become bigger,” Sharma said.

Not Cheap

A deal for Mead Johnson, whose shares have almost tripled in the past five years, would also be expensive and could require equity financing, said Molloy of Credit Suisse and Targett of Berenberg.

Today, shares of Mead Johnson rose 2.8 percent to $85.46 for the biggest gain in almost two months.

Jefferies analyst Alex Howson’s estimated price tag of about 15 billion euros values Mead Johnson at one of the highest profit multiples paid in a food deal of more than $10 billion, according to data compiled by Bloomberg.

Danone may prefer to do smaller acquisitions in Asia, said David Hayes, a London-based analyst at Nomura Holdings Inc.

After the botulism scare in Asia, “it’s taken a while to get the brand equity that was there repaired,” Hayes said in a phone interview. “If you could find an asset that would give you, in a more surgical way, very direct help without having a lot of baggage with it, then you would take the opportunity.”

Even so, Danone needs a big transaction if it has any hopes of becoming a leader in baby formula, according to Molloy of Credit Suisse.

“While a tie-up wouldn’t be without challenges and without a partner it would stretch Danone’s financial resources, it would also be the only realistic way to challenge Nestle,” the analyst wrote.

–With assistance from Andrew Roberts in Paris.

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