Reckitt Benckiser in talks to buy US baby milk group for $16.7bn

Durex and Nurofen maker Reckitt Benckiser confirmed that it is “advanced negotiations” to buy US baby milk company Mead Johnson for around $16.7bn, a move which could bolster its health products business.

The Slough-based consumer goods company, which also makes Cillit Bang and Dettol, said that it is in talks to buy each Mead Johnson share for $90 in cash giving the US company a value of about $16.7bn.

Reckitt stressed that there is no certainty that any deal with be reached and that it would finance the possible acquisition from cash and debt, while retaining a strong credit rating.

Both the London-listed company and Mead Johnson are currently going through due diligence and contract discussions.

The takeover would strengthen its health products business and increase its presence in Asia, where Mead Johnson generates most of its revenues and has 12% share of the baby milk market.

There had been many rumours that Mead Johnson would be takeover with Nestle and Danone tipped as likely suitors. French yogurt maker Danone instead bought US organic food company WhiteWave for £12.5bn last year.

Steve Clayton, fund manager at Hargreaves Lansdown, said that Reckitt has swooped in when Mead Johnson’s stock was close to a five year low and that Reckitt’s reputation has been built on its brand-building skills and with Mead Johnson having seen consistent downgrades to sales forecasts in recent years, there is clearly work to be done.

He said: “If the deal goes ahead, Reckitt looks set to pay in cash, so debts could reach as much as four times earnings before interest, depreciation and amortisation (EBITDA), which is where the oxygen starts to get a bit thin. But the boost to earnings could be very significant. Reckitt needs to convince the market that they have strong plans to reinvigorate the performance of Mead Johnson, and quickly pay down the debts they are taking on. Baby milk is a category with a lot of growth potential, and Mead Johnson is heavily focused on the US and Asian markets, where we expect longer term growth to be strong.

“The market’s initial reaction to the deal is positive, and we can see why. Reckitt’s track record of reinvigorating brands is a strong one, and they already have strong sales links into pharmacies and supermarkets globally. This could offer interesting synergies for sales of both Reckitt and Mead Johnson brands as the two distribution networks are intertwined. Mead Johnson may have been struggling recently, but free cash flow has been resilient. Reckitt of course is a phenomenal cash generator in its own right and together, the two businesses should be capable of quickly bringing leverage down.”

"Could this latest supplement keep the 2017 share price recovery on track after H2’s waning of sentiment from last summer’s record highs, the bubble punctured by a brace of guidance cuts and a Q3 results miss? Shares making an upside test of the 200-day moving average. A break could confirm a healthy change of trend," said Michael Van Dulken, Head of Research at Accendo Markets.

Shares in Reckitt Benckiser were up 3.05% to 7,038p at 0911 GMT.