February 10, 2017 --- Mead Johnson Nutrition Company has entered into an agreement to be acquired by Reckitt Benckiser Group plc (RB), the world's leading consumer health and hygiene company. Under the terms of the agreement, shareholders will receive $90 in cash for each common share, representing an aggregate net asset value of $16.6 billion. As a result of this transaction, Mead Johnson will become a new division of RB, whose globally recognized brands Enfamil and Nutramigen complement RB's portfolio of leading healthcare brands.
British consumer goods company RB's move will allow it to further push healthy products.
Last week, RB confirmed it was in talks worth $16.7 billion to acquire Mead Johnson Nutrition Company. This has already been reportednestleit was also preparing to bid for the US maker of vitamins and infant formula.
The terms represent a premium of 29% to Mead Johnson's closing price of $69.50 on February 1, 2017, before speculation of a possible transaction, and 24% to Mead Johnson's volume-weighted average price. 30 days. Mead Johnson from $72.37 on the same day.
Including Mead Johnson's net debt of $1.2 billion as of December 31, 2016, the aggregate value of the transaction is $17.9 billion, a multiple of 17.4 x 2016 non-GAAP EBITDA of 1 $.0 billion and 14.0 x 2016 non-GAAP EBITDA including £200 million in run fee cost savings. Until closing, Mead Johnson may continue to pay its normal quarterly dividend, not to exceed $0.4125 per share, to be declared and paid on dates consistent with the 2016 quarterly dividend declaration and payment dates. The transaction is subject to regulatory and shareholder approvals. The boards of directors of RB and Mead Johnson have approved the transaction and decided to recommend their respective shareholders to vote in favor of the transaction.
The acquisition of Mead Johnson is consistent with RB's proven strategic focus of improving consumer health and investing in power brands with attractive growth prospects. RB already reaches millions of mothers through its hygiene education programs and provides parents with relief and reassurance when their child is unwell through world-class brands such as Nurofen and Mucinex. This is reinforced by Mead Johnson's deep understanding of a new mother's journey and well-established relationships with healthcare professionals. Mead Johnson is a global leader in infant and toddler nutrition with annual sales of approximately $46 billion. RB expects the category to grow at around 3-5% per year over the medium to long term.
Growth in this category is driven by demographic trends, particularly in emerging markets, such as economic growth, urbanization, higher spending on quality nutrition, special dietary needs, a higher proportion of mothers choosing to work while their children are young, and by changes in China's one-child policy. Brand, quality and innovation are becoming increasingly important differentiators in the category. Mead Johnson: A World Leader in Infant Nutrition The Enfa family of brands is the world's leading infant nutrition franchise by revenue. Mead Johnson brings a long research and development and scientific heritage and reputation among healthcare professionals and consumers, which inspires a high level of trust in Mead Johnson and its family of brands.
The Mead Johnson portfolio excels in simplicity and focus, with approximately 80% of 2015 net sales in the Enfa family of brands and approximately 65% of 2015 net sales in three markets; China, the United States and Mexico. Mead Johnson has a strong presence in Asia and Latin America, where it generates 67% of its net sales. In 2015, Mead Johnson had net sales of $1.2 billion in China. Mead Johnson operated with an attractive gross margin of 64% and a non-GAAP operating margin of 25% in 2016.
The combination will bring significant added value. Mead Johnson's infant and infant nutrition business increases RB's consumer health revenue by about 90%, while its global Enfa franchise, which includes Enfamil, becomes RB's largest power brand. RB's goal is to bring together the best of both companies while keeping the consumer at the heart of the combined group. RB has extensive global branding and multi-channel marketing capabilities in the consumer health space and a track record of consumer-focused innovation. These capabilities, coupled with RB's culture of rapid decision-making and a commitment to performance improvement, will enable RB to add value to Mead Johnson's business and strengthen its position in key markets.
The acquisition of Mead Johnson complements RB's geographic footprint and increases its reach in developing markets by approximately 65%. Emerging markets will account for approximately 40% of the combined group's sales, with critical mass in key geographic regions, primarily China. RB's expertise in retail and white space will also enable Mead Johnson to penetrate new markets more quickly. RB and Mead Johnson have complementary e-commerce experience, particularly in China, where approximately 30% of RB's sales are online.
Rakesh Kapoor, CEO of RB, said: “The acquisition of Mead Johnson is an important step in RB's journey as a leader in consumer health. Through the Enfa family of brands, the world's leading infant nutrition franchise, we provide essential nutritional support to families. This is a natural extension of RB's Consumer Health Powerbrands portfolio, already trusted by millions of mothers, and underscores the importance of health and hygiene to their families. Mead Johnson's geographic footprint significantly strengthens our position in emerging markets, which will account for approximately 40% of total Group sales, with China becoming our second largest energy market."
“We are confident that our customer-centric culture of innovation and experience in scaling global brands will significantly grow Mead Johnson's portfolio. We will leverage the best of both businesses and continue to build on Mead Johnson's extensive R&D, quality, regulatory and specialty distribution capabilities. For investors, we have generated a total shareholder return of over 150% in the last 5 years. I am confident that by adding the Enfa franchise as the largest power brand in our portfolio, we will continue to serve our shareholders and our strategy to make a difference by providing people with innovative solutions for healthier lives and happier homes."
James Cornelius, Chairman of Mead Johnson, said: “The transaction announced today is all about value creation. First, this transaction offers tremendous value for Mead Johnson Nutrition shareholders. In addition, Reckitt Benckiser's strong financial foundation, broad global footprint, consumer brand experience and dynamic business model make him an ideal partner for the future growth and development of Mead Johnson's business. I've been a part of Mead Johnson Nutrition's journey from its days as an operating division of Bristol-Myers Squibb, through the last eight years as an independent public company, and now in this powerful new business combination. I look forward to seeing Mead Johnson flourish as an important new part of the RB organisation. For all these reasons and more, this transaction has my full support and endorsement, as well as that of my fellow Board members."
Under the terms of the agreement, Mead Johnson shareholders will receive $90 in cash for each common share, representing a total net present value of $16.6 billion. Including Mead Johnson's net debt of $1.2 billion as of December 31, 2016, the aggregate value of the transaction is $17.9 billion, a multiple of 17.4 x 2016 non-GAAP EBITDA of 1 $.0 billion and 14.0 x 2016 non-GAAP EBITDA including £200 million in run fee cost savings. RB's priority will be to grow the Mead Johnson business again in the long term. After an initial transition period, the goal of the OR is for its performance to progressively approach the upper end of the category's estimated growth rates of 3-5% per year. RB's multi-geographic supply chain infrastructure and distribution network will enhance Mead Johnson's go-to-market capabilities. RB's size and experience will also allow Mead Johnson to accelerate market entry into emerging areas where RB has in-depth and existing knowledge of local consumer health dynamics. Additionally, RB expects to leverage Mead Johnson's direct-to-consumer e-commerce platforms.
The integration of the RB and Mead Johnson businesses is expected to result in cost savings of £200m per annum by the end of the third full year following completion. This is primarily due to the elimination of duplication of administrative functions and the utilization of the combined companies' expanded scale in sourcing of raw materials and packaging, advertising and promotions and other expenses. The one-off cost of delivering the savings is expected to be around £450m.
The acquisition is expected to add adjusted diluted earnings per share ("EPS") for the first full year upon closing and a double-digit accrual in year three. The acquisition is expected to deliver an after-tax return on invested capital in excess of RB's cost of capital in year 5. RB intends to maintain its current policy of paying a dividend of around 50% of its adjusted net income.
The acquisition will be funded by new fully subscribed credit facilities from Bank of America Merrill Lynch, Deutsche Bank and HSBC. These lines include $9 billion in loans maturing in 3 to 5 years and $8 billion in bridge financing to cover cash payments, and an additional $3 billion to refinance existing Mead Johnson bonds if needed. They also include an additional £1 billion revolving credit facility to provide margin funding from the Completion Date. RB expects to refinance the bridge through a bond issue to reflect the combined group's expected cash flows.
Furthermore, the board intends not to buy back any more RB shares until the debt is significantly reduced. RB is in talks with rating agencies and expects to maintain a strong investment grade rating.
RB has a long history of effectively integrating consumer healthcare companies, as evidenced by its acquisitions of Boots Healthcare International, Adams and SSL. Each was a major turning point in RB's growth. RB's integration approach will be to leverage the best of both businesses. RB will establish a child nutrition department that will report directly to RB's CEO. A select number of key RB staff will transfer to this new department.
RB will balance the opportunity to realize savings in purchasing and administration costs with the need to retain and invest in valuable talent at Mead Johnson, particularly in R&D, quality, regulatory and specialized distribution capabilities. The aim will be to ensure the right balance of RB leadership and FMCG talent, skills and experience that have helped establish Mead Johnson as a leader in infant nutrition. During the integration and beyond, the combined group will focus on operational rigor, quality and compliance as the foundation for a successful business.
Due to its size, the Proposed Acquisition represents a Class 1 transaction for RB under UK listing rules and therefore requires the approval of RB's shareholders. In due course, RB will issue a circular to its shareholders requesting a meeting to approve the acquisition. The board of RB unanimously recommends the transaction. The acquisition is also subject to Mead Johnson shareholder approvals, regulatory approvals (including in the US, China and other markets) and other customary conditions. The transaction is expected to close by the end of the third quarter of 2017.
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