Mead Johnson-Reckitt Benckiser Mega Deal: A Strategic Fit?

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Leading pediatric nutrition manufacturer Mead Johnson Nutrition CompanyMJN recently announced an agreement to be acquired by British consumer-products maker, Reckitt Benckiser Group plc. The company's shares jumped 5.62% to close at $87.72 following the news.

The total transaction value of the deal has been fixed at $17.9 billion which includes Mead Johnson's net debt of $1.2 billion as of Dec 31, 2016. This represents $90 per share of Mead Johnson's common stock, a 29% premium to the company's closing price on Feb 1, before market speculation of a potential transaction took place.

Reckitt Benckiser, which owns famous power brands like Strepsils, Durex, Lysol, Dettol and many more, plans to add Mead Johnson's global brands Enfamil and Nutramigen as a new division within the company's portfolio. The transaction, which has already been unanimously approved by the Mead Johnson's board of directors, is expected to close during the third quarter of 2017 subject to certain customary closing conditions. Until then, Mead Johnson will continue to pay its normal quarterly dividends.

How the Acquisition Benefits the Companies

Both the companies expect the deal to be a strategic fit. The successful completion of the integration will lead to medium to long-term growth of 3-5% in global infant and children's nutrition category of Mead Johnson, which is currently worth approximately $46 billion in annual sales. After an initial transitional period, Reckitt Benckiser expects to perform progressively toward achieving the upper end of this estimated range.

Reckitt Benckiser's multi-geography supply chain infrastructure and distribution network should enhance Mead Johnson's go-to-market capabilities. This apart, it will also accelerate Mead Johnson's entry into new emerging geographies where Reckitt Benckiser already has an existing and deep understanding of local consumer health dynamics.

The consolidation is expected to be accretive to adjusted earnings per share of Reckitt Benckiser in the first full year post completion and double-digit accretive by the third year. There will be 200 million pounds of annual cost savings as well.

Share Price Movement

In this regard, we note that Mead Johnson was trading significantly below the Zacks categorized Food - Miscellaneous industry in the last three months, thanks to the company's dismal fourth-quarter results. The company witnessed poor sales performance with all of its segments. In emerging markets, turmoil in Brazil, Venezuela and Argentina hampered overall growth.

However, the company's shares gained significantly following the news of this acquisition, reflecting huge investor optimism on the impending consolidation. Per the last share price movement, the stock has gained 21.44% over this period, much higher than the 6.1% gain of the broader industry trend.

Zacks Rank & Key Picks

Mead Johnson currently bears a Zacks Rank #5 (Strong Sell). Some better-ranked medical stocks include Glaukos Corporation GKOS , Cardiovascular Systems CSII and Neogen Corp. NEOG . Glaukos sports a Zacks Rank #1 (Strong Buy) while Cardiovascular Systems and Neogen carry a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

Glaukos gained over 100% in the last one year compared with the S&P 500's gain of only 23.9%. The company has a stellar four-quarter average earnings surprise of over 100%.

Cardiovascular Systems surged over 100% in the last one year compared with the S&P 500. It has a four-quarter average earnings surprise of 67.8%.

Neogen gained 32.3% in the past one year, better than the S&P 500 mark. The stock has an impressive long-term earnings growth of 16.7% for the next five years compared with the industry average of 15.2%.

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Mead Johnson Nutrition Company (MJN): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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