Though acquisition rumors continue to swaddle Mead Johnson, the Glenview-based maker of infant formula, some analysts say significant antitrust challenges remain for any would-be adoptive parents.
Mead Johnson stock spiked last week following a report that Swiss food company Nestle was considering a takeover bid. Nestle is the largest supplier of baby food globally in terms of retail sales; Danone is the second-largest and Mead Johnson the third-largest, according to Euromonitor data.
Last March, Danone was rumored to be in the hunt for Mead, but then its $12.5 billion acquisition of Colorado-based WhiteWave Foods, announced in July but pending regulatory approval, effectively scuttled such talk.
«(Mead Johnson) has been the subject of rumors for a long time, on and off. It seems like speculation gets dusted off every now and then,» said Zain Akbari, a Morningstar analyst who covers Mead Johnson.
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On the possibility of Nestle acquiring Mead Johnson, Akbari said such a merger could face difficulty gaining antitrust regulatory approval in the U.S. and other markets. On the other hand, he said, it’s unclear at this point how Department of Justice antitrust officials will operate under the Trump administration.
And in the U.S., the competitive market for infant formula largely is determined by which companies secure state contracts with the Women, Infants and Children program, through which federal grants are awarded to states to provide nutritional assistance to low-income women and their children, Akbari said. That could offset some antitrust concerns.
When a company like Mead Johnson is contracted to provide heavily subsidized infant formula through the WIC program, it tends to dominate market share in that state, he said. Mothers receiving formula through the program typically supplement it with formula bought at stores, which is where the real profits come in for Mead Johnson, Akbari said.
And that’s largely why Mead Johnson is considered an attractive target for acquisition: It’s a pure-play infant formula company with high profit margins that has a strong grip on a protected market.
Depending on how the Trump administration’s approach to antitrust concerns unfolds, «rumors might start to crystallize into something more meaningful,» Akbari said.
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In a recent research note, Pablo Zuanic, an analyst with Susquehanna International Group, put the probability of Nestle acquiring Mead Johnson as «lower than ever before.»
The merger would run into antitrust problems, particularly in China, Hong Kong, the U.S. and the Philippines, four markets that represent more than 75 percent of Mead Johnson sales, Zuanic said. The Chinese government likely would disapprove of a merger between the two foreign infant formula companies, he said.
But even if the rumored Nestle acquisition doesn’t come to pass, other suitors could come forward. Many believe Kraft Heinz, backed by Warren Buffett’s Berkshire Hathaway and the Brazilian firm 3G Capital, is due for an acquisition. Danone, which Akbari believes to be the most logical fit for Mead Johnson, could also come back to Mead Johnson after enough time passes.
Mead Johnson, which released its quarterly earnings results Thursday morning, reported fourth-quarter net income of $167.8 million, which amounted to 91 cents per share, or 78 cents per share when adjusted for nonrecurring gains. It also posted revenue of $901.6 million in the period. The results fell short of Wall Street expectations.
Source: ChicagoTribune
Link: http://www.chicagotribune.com/business/ct-mead-johnson-nestle-0127-biz-20170126-story.html