Reckitt Benckiser is in advanced talks to buy Mead Johnson in a deal worth $16.7bn, the second largest UK takeover of a foreign company since the Brexit vote. Mead Johnson is a producer of nutrition products for infants, children and expectant mothers; it has about 14% of the worldwide baby food market and is the world’s No. 2 infant formula maker with its flagship Enfamil brand.
The deal appears to be interesting for Reckitt Benckiser; firstly, it takes the company into new territory by entering the baby food market and provides them with one of the biggest brands in this area; secondly, the deal aims to boost US operations and provide exposure to Asia’s fast-growing middle class, for whom food quality is of increasing importance. China’s decision in 2015 to give up on its one-child policy is likely to lead to a substantial increase in the addressable market and will have been a attractive factor in the decision – Mead Johnson derive roughly half of its sales from Asia.
The bid represents a c. 30% premium to the current value of Mead Johnson and the deal is not without its risks. Baby food represents new ground for Reckitt Benckiser, and Mead Johnson already has high profitability, questions marks have therefore been raised over what Reckitt Benckiser can bring to enhance the business. The baby food market in China has been subject to various scandals over the years and the government’s promotion of breast feeding has also impacted sales in the sector.
Reckitt Benckiser has a great track-record of reducing costs and growing their acquisitions. CEO Rakesh Kapoor will hope to bring his valuable experience of this, and of managing ‘power brands’, to the baby food market, providing new operations in growth markets.
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