Consumer products giant Reckitt Benckiser Group PLC (LON:RB.) has sealed a deal to buy US baby food maker Mead Johnson Nutrition Co (NYSE:MJN) for US$16.60bn as it posted higher 2016 profits, although currency factors impacted.
The FTSE 100-listed group is paying US$90.00 a share for Mead Johnson, with the deal worth US$17.90bn including the US firm’s debt.
Reckitt had confirmed last week it was in negotiations with the New York-listed firm, and the terms of the deal are similar to those revealed then.
The agreement adds infant and children’s nutrition franchise to Reckitt’s brand portfolio which includes products as diverse as Durex condoms, Cilit Bang detergents, and Lysol lip balm.
Reckitt said it expects to generate £200.0mln in annual cost savings from the acquisition by the end of the third year of ownership.
The UK group added that it expects the deal to complete by the end of the third quarter of 2017.
Reckitt’s chief executive Rakesh Kapoor said: “We are confident that our culture of consumer centric innovation and our expertise in scaling global brands will deliver significant growth for the Mead Johnson portfolio.”
Profits rise, but currencies drag …
The deal was announced as Reckitt also reported full-year 2016 results showing reported net income increased by 5% to £1.832bn, although at constant currencies that was a 5% decline on the previous year.
Reckitt’s full-year net revenues rose to £9.89bn, up 11% from £8.87bn, or up 2% at constant currencies.
But the group’s like-for-like net revenue growth was 3.0% for 2016, below the 4.0% guidance Reckitt provided with its third quarter update in October.
Kapoor said: “2016 was a good year in which we achieved broad-based growth and excellent margin expansion, despite challenging markets and an unusual number of issues.”
The group will pay a final dividend of 95.0p per share, up from 88.7p a year earlier, giving a total dividend payout of 153.20p, up 10% from the 139.00p paid in 2015.
Liberum upbeat …
In early trading, Reckitt shares gained 1.3%, or 94p at 7,333p.
Repeating a ‘buy’ rating and 7,650p price target on Reckitt shares, analysts at Liberum said: “The acquisition of Mead will transform Reckitt’s operations reducing exposure to low growth and constrained margins at the group’s Home division while pushing the group substantially towards faster growing categories with higher margins long-term.”
While noting that Reckitt’s 2016 organic sales growth of 1% slightly missed consensus forecasts of 1.7%, they pointed out that Reckitt’s valuation “is underpinned in our view by the group’s strong progress toward building a global powerhouse in Consumer Health.”
Meanwhile, Steve Clayton, fund manager of the £225m HL Select UK Shares fund, which has a 4.5% position in Reckitt said: “These look like decent numbers and MJN takes RB deeper into Consumer Healthcare, which is an attractive long term category to be in.
”There are risks too, because RB is gearing up a lot to buy a business that has struggled in recent years. But building brands and raising performance is stock-in-trade for RB, and the growth potential for infant milk sales is exciting, especially in the emerging markets.”
He added: “RB is our largest holding in the HL Select UK Shares fund, because of its track record of generating growth and free cash flow in large measures. These results show those strengths remain intact and if RB can reinvigorate MJN, there could be a lot more to come.”
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Story by ProactiveInvestors