Reckitt Benckiser has agreed to buy U.S. baby formula maker Mead Johnson Nutrition for $16.6 billion, giving the British consumer goods company a new product line and expanding its presence in developing markets.
Reckitt, the maker of Lysol cleaners, Durex condoms and Mucinex cold medicine, said on Friday it will pay $90 in cash for Mead Johnson shares, a 30 percent premium to their closing price the day before Reckitt said it was in advanced talks with the maker of Enfamil baby formula.
Including Mead Johnson's debt, the deal is worth $17.9 billion and Reckitt Benckiser said it would finance the acquisition with debt underwritten by Bank of America/Merrill Lynch, Deutsche Bank and HSBC.
Reckitt — whose business has been hurt by a safety scandal in South Korea, slowing emerging markets and a "failed" Scholl product — also reported weaker than expected sales in the fourth quarter due to declines in Europe and North America.
Still, Reckitt's shares were little changed at in London as the Mead acquisition, which is Reckitt's biggest ever, offset the weak results.
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 United States 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 RB, and the growth potential for infant milk sales is exciting, especially in the emerging markets," Clayton said.
Reckitt said its goal was for the Mead Johnson business to perform at the upper end of an estimated sector growth rate of 3 percent to 5 percent per year in the medium to long term.
The deal should add to Reckitt's earnings in the first full year after completion and by the third year it is expected to boost earnings per share by a double-digit percentage, with 200 million pounds of annual cost savings.
Reckitt's fourth-quarter revenue was 2.76 billion pounds, up 1 percent on a like-for-like basis, it said on Friday. Several analysts said the consensus was for growth of 1.7 percent.
For the full year, like-for-like revenue rose 3 percent and reported earnings climbed 6 percent to 256.5 pence per share.
Reckitt forecast like-for-like sales growth of 3 percent on a stand-alone basis for 2017, below analyst expectations, and reiterated a medium-term target of "moderate" margin expansion.
The company said the issues that hurt it in 2016 would persist into the first half of 2017.
Subject to shareholder and regulatory approvals, Reckitt expects the Mead Johnson deal to close by the end of the third quarter. The British company said it expected to retain a strong investment grade credit rating following the deal.
Robey Warshaw and Bank of America Merrill Lynch were Reckitt's lead financial advisers, while Deutsche Bank was a financial adviser, corporate broker and sponsor. HSBC was also an adviser to Reckitt.