Mead Johnson's impending split-off from Bristol-Myers Squibb, announced Nov. 16, makes the rapidly growing nutritional company an appealing acquisition target for the back half of 2010, analysts predict.

Analysts estimate Mead Johnson could fetch bids from strategic acquirers in the $10 billion to $15 billion rage.

Bristol-Myers opted to split-off its remaining 170 million shares of Mead Johnson to focus on its biopharma business, and because of the market's favorable response to Mead Johnson's initial public offering in February (¹ Also see "Mead Johnson Set Loose To Navigate Market, Shifting Economic Winds " - Pink Sheet, 16 February, 2009.).

The deal represents an "important final step in [Mead Johnson's] journey to be a fully independent public company," notes Mead Johnson CEO Stephen Golsby in a Nov. 15 release.

Mead Johnson's independence may be short-lived though, as potential suitors likely will begin courting the Glenview, Ill.-based firm soon.

The nutritionals firm's strong growth in emerging markets and its soaring stock make it "a prime take-out candidate," said Credit Suisse analyst Catherine Arnold in a Nov. 17 note.

The IPO helped drive up Mead Johnson's stock 67 percent from $24 per share to more than $40 a share, Bristol-Myers' Chairman and CEO Jim Cornelius said Nov. 16.

The stock has "behaved like a rocket ship, so the stars literally are lined up to try this transaction before the Christmas holidays," he added.

Bristol-Myers will offer shareholders the chance to exchange some, all or none of their shares for shares of Mead Johnson at an estimated ratio of $1 to $1.10. The final exchange rate will be based on the average stock prices of the companies over a three-day period at the offer's end, slated for Dec. 14, Bristol-Myers said.

Analysts with Credit Suisse and RBC Capital Markets estimate Mead could entice a takeover bid of $57 to $60 per share. At this rate, the deal could reach upwards of $10.2 billion based on the shares Bristol-Meyers wants to split off. This implies at least a 32 percent premium over Mead's current price. A Bloomberg report quotes an analyst estimating the deal at $15 billion.

Likely Suspects

Likely bidders include Danone and Nestle, analysts with J.P. Morgan say in a Nov. 13 note. Heinz is another potential contender, although not as strong as Danone and Nestle, Arnold said.

Given Mead's potential value, it is notable that analysts do not include any pharmaceutical companies on their shortlist of potential bidders - especially when some companies are still committed to diverse portfolios to protect against impending patent cliffs (² Also see "Schering-Plough Merger Offers Merck OTC Business, Zegerid Switch Rights" - Pink Sheet, 16 March, 2009.).

Big pharmaceutical companies with nutritional product lines include Abbott, which offers infant formulas Similac and Isomil , and Johnson & Johnson, which does not offer infant formulas but sells Lactaid , Benecol and Viactiv through its subsidiary McNeil Consumer Healthcare.

Abbott acquired several businesses this year, including Wockhardt's nutritional business in India, but it seems more focused on medical technology. It recently acquired AMO, IBIS, Visogen and Evalve, Executive VP and Chief Financial Officer Thomas Freyman said during the firm's third-quarter call Oct. 14. In addition, Abbott might run into some antitrust issues if it invested in Mead Johnson, given the size of its Similac line.

J&J currently is focused on growing first through "organic investment and development, followed by partnership and collaboration" and lastly "by selective acquisitions," VP and Chief Financial Officer Dominic Caruso said Nov. 12 at the Credit Suisse Health Care Conference.

Pfizer also recently added nutritionals, including infant formulas Promil Gold , SMA and Nursoy , when it acquired Wyeth Oct. 15. Pfizer says it plans to give the consumer health business a chance to grow as part of a larger plan to diversify its portfolio (³ "The Tan Sheet" Oct. 26, 2009).

Mead Johnson could appeal to Sanofi-Aventis, which wants to expand its nonprescription business and improve its foothold in emerging markets. The likely size of the deal is a bit beyond the scope of the bolt-on acquisitions CEO Chris Viehbacher previously said the firm seeks. The addition of Mead would more than triple Sanofi's revenue from nonprescription products, outstripping the firm's goal to double these sales by 2014 (⁴ Also see "Sanofi-Aventis Acquisitions Could Double OTC Sales By 2014" - Pink Sheet, 16 February, 2009.).

Mead Johnson's Global Profile

Mead Johnson's fundamental outlook and well established infant formula and children's nutritional brands, including Enfamil , make the company more desirable than its straight sales figures, which dipped in the first three quarters of fiscal 2009.

The firm's sales were $2.88 billion in fiscal 2008, but so far in the first nine months of fiscal 2009 were down 7 percent from the same period in 2008, according to the company's sales reports.

One attractive aspect of Mead Johnson is its Asian and Latin American segments. Arnold noted these segments are "the most appealing part of its business," and "would fit well with both Danone and Nestle."

Mead Johnson's Asian and Latin American segment grew 4.9 percent to $413.9 million in the third quarter compared to the same period last year, and it represents 59 percent of the company's total sales, according to firm.

"This excellent performance was driven by double digit growth in 17 of the 31 markets we serve in these regions. This includes key Asian markets, notably China, Hong Kong, Thailand and Malaysia," Golsby noted during the firms Oct. 22 earnings call. Mead will invest in growth in Indonesia, which saw sales increase in the mid-teens in the quarter, he added.

Mead also will invest in emerging Latin American markets, which it expects to grow at a compounded annual rate of 10 percent in the next five years, Golsby said.

Even though Mead said its U.S. and European segment sales fell 16.1 percent in the third quarter to $286 million compared to the corresponding period in 2008, its overall global infant feeding market makes it "a good fit for Heinz," Arnold said.

However, she added, Heinz likely could not "swallow Mead without issuing equity and we are not sure that Heinz (or its board) has the appetite for a deal that would almost double its market cap."

That leaves Danone and Nestle as the main contenders to acquire Mead at some point, but like Heinz, they also must overcome barriers, according to Arnold.

For example, Danone has little experience with the U.S. government's Women, Infants and Children program, or with formula in the U.S., she said. Nor does it have enough support for an all-stock deal, which means it probably will not be able to finance a bid in the near term, she added.

Nestle, on the other hand, "would have no problem financing the business," thanks to the $28 billion it will receive next summer for selling its stake in Alcon to Novartis (⁵ 'The Tan Sheet' July 14, 2008).

The maker of Carnation infant formula could run into anti-trust issues though if it moves to acquire, "given Mead Johnson's 43 percent market share and Nestle's 10 percent share," Arnold cautioned. She added, "Nestle could also face anti-trust issues in Mexico where they have around 57 percent market share and Mead has around 14 percent share."

Target Late 2010

If an acquisition occurs, it likely will not be any time soon.

Mead says in Nov. 17 Securities and Exchange Commission filings it will not sell itself unless the International Revenue Service guarantees the tax-free status of the split-off.

"U.S. tax rules require a waiting period of six to 24 months after a split-off to preserve the tax-free treatment," Arnold explained.

Because most bidders probably discussed a potential acquisition with Bristol-Myers "long-before" the IPO or split-off were announced, they will likely need to wait six months to make an offer, she added.

A potential suitor could make an offer earlier though if it can "demonstrate that the move was not part of a pre-IPO plan," add J.P. Morgan analysts.

- Elizabeth Crawford ( ⁶ e.crawford@elsevier.com )

Mead Johnson Likely To Draw Suitors Following BMS Split

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