Ulf Mark Schneider, the new chief executive of Nestle SA, is wasting no time in hunting out acquisitions.
The Swiss consumer group is considering a takeover of Mead Johnson Nutrition Co., the U.S. baby-formula producer, according to a report yesterday from StreetInsider.
But right now, Nestle's sprawling portfolio needs pruning, not fresh additions. This looks like a deal it should skip.
There are some compelling reasons why it might make sense: Nestle is already the global leader in baby foods, while Mead Johnson is number three. Putting them together would create a powerful force in this market. What's more, over half of Mead Johnson's operating income comes from Asia, which has greater growth potential.
And the timing looks fortunate too, since shares in Mead Johnson had fallen about 19 percent since the end of July. As my colleague Brooke Sutherland pointed out, they've been hit by Danone SA's choice to overlook Mead Johnson's baby food prowess in favor of a move into milk alternatives, with its $12.5 billion purchase of WhiteWave.
Add to this that Schneider is, as Gadfly has argued, something of a deal junkie, his arrival at Nestle on Jan. 1 might be looked on as the trigger for this long-vaunted combination to come to fruition. Nestle declined to comment.
This doesn't mean the deal's a good idea. The companies' chunky market shares raise the prospect of regulatory constraints, and this is the biggest hurdle to a combination, according to Bloomberg Intelligence's Duncan Fox.
Analysts at Royal Bank of Canada estimate that markets accounting for about 70 percent of Mead Johnson's sales, including China, the U.S. and Mexico, would be likely to encounter competition issues.
And despite the share price slump, Mead Johnson would still be a sizeable acquisition, given its enterprise value of about $15 billion.
Nestle can easily afford it. Net debt is at just over one times earnings before interest, tax, depreciation and amortization as of mid-2016. And that's before Schneider raises any additional cash from disposals.
But the deal economics don’t look too inspiring. Analysts at RBC estimate that, assuming a 25 percent premium and synergies of 5 percent of Mead Johnson's sales, the deal would be 3 to 4 percent accretive to 2018 pro-forma earnings.
Perhaps the biggest drawback is that what Nestle needs right now is a rationalization of its portfolio, in order to slough off some of its low-growth legacy businesses and concentrate on faster-expanding ones. As Gadfly has argued, the most obvious disposal candidates are U.S. prepared food and all or part of confectionary, which together could raise up to $35 billion.
Schneider should also sort out the health science arm, where sales have been slowing, before bolstering the nutrition division. But if he does indeed live up to his reputation as a big dealmaker by going for Mead Johnson, Nestle's reshaping could be pushed back further. This acquisition looks like a big distraction with little compelling benefit.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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