Deals

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

The start of each year is when deal-watchers such as myself like to ponder transactions we thought would have happened in the prior 12 months but didn't. Are they any more (or less) likely now? Does the rationale still hold true? Do the numbers work? 

With that in mind, here's an intriguing one: the perennially speculated takeover target Mead Johnson. 

This is the $15 billion company behind Enfamil infant formula. It used to be larger, but the stock has tumbled 26 percent since reaching a high in February 2015. During that time, the competition really intensified among baby-food makers, which include Nestle and Danone, as they all went after the big growth opportunity in Asia. That led to them cutting prices on their products. And even though lower raw-material costs did help widen margins, Mead Johnson shares look like this:

Competition Rocks The Cradle
Shares of the infant-formula producer posted their worst return in 2015 since the business was spun off from drugmaker Bristol-Myers Squibb in 2009.
Source: Bloomberg

For years, Mead Johnson has been considered to be "in play," with Paris-based Danone the most probable buyer. The logic behind a merger definitely exists, perhaps more than ever.

Asia's growth in food sales will likely outpace the rest of the world's over at least the next five years (the latest market turmoil aside), and baby food will be the region's fastest-growing food category, according to Euromonitor estimates. Mead Johnson generates a third of its revenue in Asia, mostly China. And while Nestle is the leader there, with a more than 19 percent share of the market, Mead Johnson's 12 percent slice doesn't put it far behind. As for Danone, it has a 9 percent market share and is probably eager for more. (Plus, in October China ended its one-child policy.)

Danone shareholders and analysts told Bloomberg's Corinne Gretler and me in mid-2014 that they wanted the company to hold off on a big Mead Johnson purchase while it was still reeling from a product-safety scare in China and bribery claims. 

Enviable Position
Mead Johnson has the second-largest share of the fast-growing Asian baby-food market.
Source: Bloomberg

Cecile Cabanis, the company's chief financial officer, said in November that Danone is focused on organic growth and doesn't need to make a transformative acquisition (a la Mead Johnson). That doesn't sound like they've ruled one out, though. 

And if there were ever a time, Mead Johnson has gotten $5 billion cheaper in the last nine months. Valued at nearly 15 times this year's estimated Ebitda, its shares are still about 25 percent pricier than Danone's, so a stock swap would initially be dilutive (ignoring synergies). As of June, Danone had 3.75 billion euros of cash and equivalents, which is about $3.9 billion. If it could pay for at least 25 percent of a Mead Johnson purchase with cash and extract $100 million of cost savings, Bloomberg's merger calculator estimates a 5 percent boost to earnings this year. 

Danone, if it were thinking about making an offer, should keep in mind that analysts project Mead Johnson's stock will recover 13 percent this year. And we're at what is probably the tail-end of the biggest merger spree Wall Street has ever seen, so there's a sense that acquirers should strike while the iron's still hot. 

So, does the rationale still hold true? Yes. Can the numbers work? Yes. Is a transaction more likely now? Maybe. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net