Reckitt Benckiser is in advanced talks to buy Mead Johnson Nutrition in a $16.7 billion deal that would take the British consumer goods maker into the baby formula market and boost its business outside Europe.
Best known for its Lysol cleaners, Durex condoms, Nurofen tablets and Scholl footcare products, Reckitt said late on Wednesday it was discussing a $90 per share cash offer, a 29.5 percent premium to Mead's closing price.
Mead shares were up 24 percent at $86.39 on Thursday in New York. In London, Reckitt shares were up 4 percent at 7,102 pence, as enthusiasm over the deal's potential to lift profits overshadowed questions around price and strategy for going up against tough rivals Nestle and Danone.
"The shares are up because the deal as mooted is likely to be meaningfully EPS (earnings per share) enhancing," said Philip Haworth, investment manager at Kames Capital, which owns Reckitt shares.
"That alone doesn't mean it is a good deal but management at RB have earned the right to be given the benefit of the doubt and to explain the strategic benefits to shareholders."
A deal would be the latest in a series involving UK companies since the year began, as they consider options following the country's vote to leave the European Union.
Reckitt said "the parties are presently engaged in a period of due diligence and contract discussion". It said a further announcement would be made as appropriate.
Mead, which also confirmed the talks, is the world's No. 2 infant formula maker with its Enfamil brand. It was spun off from U.S. drugmaker Bristol-Myers Squibb in 2009.
It has been seen as a possible takeover target due to its big presence in China and Latin America, regions with fast-growing populations, as well as in the United States.
Reckitt has a long history of successful deals, but its interest in consumer health products, such as over-the-counter medicines, had led to speculation about other potential targets such as the consumer portfolios of GlaxoSmithKline, with its Sensodyne toothpaste, and Pfizer, maker of Centrum vitamins and Advil tablets.
With those deals apparently out of reach, and Reckitt's core business slowing amid weakening economies and a boycott in South Korea due to a safety scandal, a move for Mead is logical, analysts and bankers said.
"It's a branded consumer proposition with healthcare-y attributes," said RBC Capital Markets analysts, adding the absence of any product overlap meant antitrust scrutiny would be minimal.
The proposed price represents a multiple of 17 times Mead's estimated 2017 earnings before interest, tax, depreciation and amortisation (EBITDA), analysts at Wells Fargo said.
Nestle paid 20 times for the Wyeth baby formula business in 2012 and Danone paid 22 times for Numico in 2007.
Still, the premium is in line with other recent consumer staples deals, and is appropriate given regulatory changes in China and price promotion, analysts said.
Mead's share price has fallen by a third over the past two years, as sales have slowed and it lost market share. Its biggest market, China, has seen intense local competition amid a shift in buying habits away from traditional retailers into e-commerce and speciality stores.