Reckitt Benckiser said it would finance the acquisition with debt underwritten by Bank of America Merrill Lynch, Deutsche Bank, and HSBC.
Reckitt’s business has been hurt by a safety scandal in South Korea, slowing emerging markets and a “failed” Scholl product. It also reported weaker-than-expected sales in the fourth quarter due to declines in Europe and north America. The company said issues that hurt it in 2016 would persist in the first half of 2017. The Mead acquisition is Reckitt’s biggest ever.
Reckitt chief executive Rakesh Kapoor said the deal was “a significant inflection point” for its business as it nearly doubled the size of its faster-growing consumer health business and expanded Reckitt’s developing market presence by two thirds.
China will become Reckitt’s second-largest market behind the US following the acquisition of Mead Johnson, which was long seen as a potential takeover target for Danone or Nestle but never Reckitt.
Analysts at Credit Suisse said the Mead Johnson acquisition “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”.
Mead Johnson, whose shares had fallen by a third over the past two years, has lost market share in China lately 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 Mead’s poor recent performance was a risk.
“But building brands and raising performance is stock-in-trade for Reckitt Benckiser, and the growth potential for infant milk sales is exciting, especially in the emerging markets,” he said.
Reckitt said its goal was for Mead Johnson to perform at the upper end of an estimated sector growth rate of 3% to 5% per year in the medium to long-term. The deal should add to Reckitt’s earnings in the first full year.
Subject to approval, Reckitt aims to close the deal by the end of the third quarter.