The FTSE 100 company confirmed on Thursday morning that it was in “advanced talks” with Mead Johnson to buy the US-based producer of baby milk for almost $17bn (£13.1bn).
Kapoor has made no secret of the fact that he’s been on the lookout for acquisitions since losing out to Germany’s Bayer in 2014 in a fight to acquire the consumer healthcare unit of Merck.
The €14.2bn price Bayer paid was too rich for Kapoor’s blood, who said at the time his company was “a highly disciplined acquirer with strict return metrics, which we will not break”.
But even then, he signalled that he was on hunt for other opportunities, adding that “the consumer health market remains highly fragmented and we will continue to evaluate opportunities that fit both our strategic and financial criteria”.
It seems that he has finally pounced, with the negotiations around a potential $90 a share offer – representing a premium of 30pc on the current share price. Should an offer materialise, it will be financed through a combination of cash and debt.
What is Mead Johnson?
The company is a big player in nutrition products for infants, children and expectant mothers. And it is big – it has about 14pc of the worldwide baby food market, not far behind Nestlé, which has just over 20pc.
The baby food market itself is massive. A recent report by Zion Market Research valued it at $53.3bn in 2015, and forecast it will grow to $76.5bn by 2021.
Johnson Mead had revenues of $4.1bn in 2015 and made a pre-tax profit of $871m.
Why is Reckitt Benckiser interested?
The FTSE 100 group is looking for growth and has the financial firepower to buy it. It’s made some acquisitions over the past few years but Mead would be a real game changer, and move the company into a new – and massive – market.
Reckitt is best known for its Dettol, Durex, Scholl, Harpic and Vanish products – it calls them its “power brands” – along with its over-the-counter (OTC), non-prescription products such as Nurofen. Buying Mead would broaden Reckitt’s horizons.
Cynics might argue that Kapoor wants – or even needs – a big deal after losing out on Merck.
Reckitt had much to gain from the Merck deal: the acquisition would have made it the world’s third-largest purveyor of OTC healthcare products, and would have generated cost savings in production and sales.
Why break out of the markets Reckitt knows?
It might not have any other choice, according to Credit Suisse analysts, who said in a note that while the target is “most certainly a surprise and rather left-field [it is] perhaps not fully off the beaten track. Adding infant milk formula was not what we were expecting but there were no obvious OTC assets to tackle”.
UBS analyst Pinar Ergun echoed the sentiment, expressing “surprise” at Mead being singled out. However UBS had previously flagged that Reckitt “could consider M&A outside OTC”. She added that Mead was “not a natural fit for Reckitt and will need to convince the market of the rationale for the deal”.
Ms Ergun did see some positives: “Critics are likely to argue that Reckitt is desperate to do deals, pointing out the scarcity of core health/hygiene assets on offer. We take a more balanced view: Reckitt management’s strong track record in balancing growth/margins could go down well at Mead, and the long-term category dynamics are attractive.”
Any other factors to consider?
Reckitt is facing headwinds in emerging markets, while many developed ones are facing pressures that are holding back growth. Buying Mead could alleviate some of these – 50pc of Mead’s sales are in Asia and 17pc in South America, and UBS has made a rough calculation that the deal could boost earnings per share by 10pc in its first year.
Synergies would also likely be created in a combination, though Credit Suisse sees few “obvious ones outside of head office and maybe a little distribution”. Reckitt’s management has a strong M&A track record so they could well find more.
Can Reckitt afford it?
Easily. The company – which has a market value of £49bn – had revenues last year of £8.8bn, made a profit of £2.2bn, and has debt of only £1.6bn. A purchase would push its debt ratio up from 0.6 times earnings before interest, tax, depreciation and amortisation to 3.5 times – far from unmanageable.
Is it a good price?
A $90 a share price implies a valuation of 18.3 before synergies, according to Liberum. This is lower than the 21.7 times Danone paid for Numico and closer to the 15.7 times Nestlé paid for Gerber and the 19.8 times it paid for Wyeth Nutrition.
Mead shares are down about a quarter over the past six months, so Reckitt could have swooped now to take advantage of their weakness.
Is anyone else in the running?
Before Reckitt emerged, Danone was seen as the most likely buyer, though the French business might be too busy with integration of previous acquisitions. Nestlé would seem a natural fit but the market dominance it would achieve buying Mead would be a regulatory minefield. Other outsiders could include Unilever, a Chinese buyer or even a major pharma group. But no one has broken cover yet.
Sell to buy?
Kapoor’s admission that he is focused on consumer health products could indicate that he will sell off some other products to help get the deal away, but if he does it certainly won’t be to help finance a deal.
When will it take place if they agree a sale?
It’s hard to say but the fact that Reckitt says negotiations are “advanced” indicated that it has done a very thorough examination of Mead’s finances and thinks it can make a go of it, implying the FTSE 100 giant is not hanging about.
Kapoor is one of the country’s best rewarded executives with a £23m pay deal. He’s motivated to do something transformational to earn that salary and has faced investor disquiet over his earnings in the past.
A funny thing
Normally when a potential deal is revealed, the buyer’s shares fall and the target’s rise. Reckitt’s shares were up 4pc in midday trading, in what Mike van Dulken of Accendo Markets suggested could be recognition that the acquisition implies “better growth and higher margins for a behemoth stuck in a rut”.
A big deal
According to figures from Datalogic, Reckitt buying Mead would be the second largest acquisition in the past year of US company by a British one. It’s beaten only by the mammoth – and still pending – purchase by British American Tobacco of the 58pc of Reynolds American it does not own, which is valued at $60bn.
It’s more than double Micro Focus’s still-to-complete purchase of HP Enterprise for $8.8bn, and Melrose buying Nortek for for $2.8bn.