Baby formula maker Mead Johnson’s a takeover darling

By Jessica Hall

PHILADELPHIA, (Nov 24) – (BestGrowthStock) – Mead Johnson Nutrition Co (MJN.N: ), maker of Enfamil baby formula, offers a rare combination of revenue growth, exposure to fast-growing emerging markets and established brands that makes it an ideal takeover candidate.

The only question is the timing.

Mead Johnson has a market capitalization of more than $12 billion. It went public in February 2009 as a spin-off from Bristol Myers Squibb Co (BMY.N: ). Under the terms of that tax-free spin-off, Mead Johnson can be bought starting in February 2011 without triggering tax penalties.

“It’s the best company in our universe, but it’s also the most expensive,” said one consumer products banker, who declined to be named. The banker was not authorized to speak to the media. “Everyone who can afford it will want to take a look at it,” that person said.

Analysts and investment bankers expect companies like Danone SA (DANO.PA: ), Nestle (NESN.VX: ) and Johnson & Johnson (JNJ.N: ) to look.

“Great assets. Great margins. It’s got some air built into it already as far as the premium goes, but it’s also been doing well as far as results,” said a second banker. That person also was not authorized to speak to media and declined to be identified by name.

“No one is going to want to get into a knife fight with someone who has a strategic interest and financial ability to do this. So there will be plenty of people who look, but only a select handful who can go several rounds (of bidding),” the second banker said.

Mead Johnson, with 70 percent of its sales coming from infant formula and 55 percent from emerging markets, would be a good, but expensive fit for Danone. It would also double Danone’s presence in Asia and give it a foothold in Latin America, where Nestle dominates.

However, Nestle could run into antitrust problems, while Danone, maker of Bledina babyfood, would likely need to sell assets to justify a big purchase, analysts said. [nLDE6AB0AR]

Mead Johnson could not be reached for comment. The company has not hired a banker to weigh strategic options or mull a sale, sources familiar with the situation said.

GROUNDS FOR A HIGH VALUATION

Mead Johnson trades at more than 20 times estimated earnings, compared with a sector median of 16 times earnings, according to Thomson Reuters data.

There may be good reason behind that valuation. Last month, Mead posted better-than-expected third-quarter earnings and raised its 2010 outlook. Enfamil gained U.S. market share following a recall of rival brand Similac, and the company posted an enviable 18 percent gain in net sales in Asia and Latin America.

“In our view, the current 21-times P/E (price-earnings) multiple on 2011 earnings is not excessive for a company with Mead’s growth profile, economics and appeal as a takeout candidate,” RBC analysts said in a recent report.

Mead Johnson’s stock has gained about 35 percent so far this year. That compares with 8.4 percent gain in the S&P 1500 Packaged Foods & Meats Index (.15GSPFOOD: ).

“While shares likely trade with a partial takeout premium, we believe the company could fetch nice upside to current levels in an acquisition scenario,” RBC analysts said.

The consumer products industry has also seen deal volume nearly double as funding becomes more available and suitors seek new areas where they can grow.

So far this year, there has been $67.1 billion in consumer products mergers and acquisitions, compared with $35.7 billion a year ago, according to data from Thomson Reuters.

Other consumer products companies that have attracted takeover interest this year include Del Monte Foods Co (DLM.N: ), which is in advanced deal talks with private equity firm Kohlberg Kravis Roberts & Co (KKR.UL: ). Rockstar energy drinks recently hired bankers to help it explore strategic options.

“In the consumer space, they’re (Mead Johnson) one of the few companies where you can really look and see long-term upper-single-digit top-line growth and low double-digit earnings growth. They’ve got growing emerging market exposure, which I think most people would be extremely happy to have,” said Morningstar analyst David Sekerahe, citing its businesses and expansion plans in China, India and Latin America.

Sekerahe also mentioned Mead’s rate of free cash flow — in the low teens as a percent of sales — its established, market-leading brands and high return on invested capital.

“When people are looking at potential acquisitions, based on those dynamics, this probably comes up toward the top of their screens,” Sekerahe said.

One problem for Mead Johnson is its exposure to the U.S. market. Although the market is weak because of the slow U.S. birth rate, the company participates in a government program to provide nutritional products for women, infants, and children (WIC) up to age five who are at nutritional risk.

Mead Johnson is the leader in the program, holding contracts that supply about 41 percent of the program’s births across 14 states and Puerto Rico, according to Standard & Poor’s analysts.

Although Mead Johnson is ripe for takeover in February, some think the company could thrive on its own.

“I don’t see why they would be in any hurry to sell the company. … There’s still a lot of growth that these guys would be able to capture in order to grow the business themselves before they’d need to sell it out to anybody,” Sekerahe said.

(Reporting by Jessica Hall. Additional reporting by Martinne Geller in New York. Editing by Michele Gershberg and Robert MacMillan)

Baby formula maker Mead Johnson’s a takeover darling