Inside Wall Street: Newly Independent Mead Johnson Could Be Buyout Bait

Mead Johnson (MJN) is getting a lot of fresh attention on Wall Street. Now an independent publicly traded company after Bristol-Myers Squibb (BMY) sold its controlling 83% stake in December, Mead is attracting new interest not just because of its global dominance in infant formula and children's nutritional products. It's also a potential buyout target.%%DynaPub-Enhancement class="enhancement contentType-HTML Content fragmentId-1 payloadId-61603 alignment-right size-small"%%The likes of Switzerland's Nestle (NSRGY) and France's Danone (DANOY) are being bandied about as possible suitors because of their compatible product lines. As the world's largest food company, Nestle has an array of food and beverage brands such as Nescafe, Perrier and Kit Kat. It also makes baby foods, cereals and dairy products. Danone is also a major producer of a wide range of food and beverages, including fresh dairy products such as Dannon yogurt, Danonino and Nutricia baby food, and Evian and Volvic bottled water.

Mead's line of 70 products includes Enfamil infant formula for a broad range of nutritional needs of infants, children and expectant and nursing mothers. Marketed in more than 50 countries, they generated estimated sales of $2.8 billion in 2009. Some analysts see that climbing to $3 billion this year.

Global Growth, Plus Added Spice

Mead Johnson was a wholly owned subsidiary of Bristol-Myers since 1967. In February 2009, Bristol-Myers took Mead public but retained 55% of the Class A shares and 100% of its voting Class B shares. However, Bristol-Myers decided to unload its total stake last month by converting its Class B shares into Class A and then sold all of its 83% stake.

As an independent pure play in pediatric nutritional products, Mead's allure is its huge potential for growth worldwide, particularly in the emerging countries, including India and China. And the possibility of becoming a takeover target has added spice to the stock, which has climbed to $45 a share on Jan. 13, 2010, from $43 on Dec. 23, 2009, when the spin-off was completed.

With a market capitalization now of $9 billion, Mead has been added to one of Wall Street's exclusive clubs -- the Standard & Poor's 500-stock index. Its inclusion increases the number of institutional investors loading up on the stock. That's because many institutional portfolio managers make it a point to include components of the S&P 500 in their portfolios.

"Precursor to an Eventual Sale"

Beyond the spin-off benefiting Mead by letting it stand on its own, some analysts believe the move paves the way for Mead to become a takeover target. Investors may view this transaction "as a precursor to an eventual sale of the company," says Edward Aaron, analyst at RBC Capital Markets, who rates the stock outperform. "We believe the uniqueness and attractiveness of this asset will ultimately create more value for shareholders," he adds. (RBC has done banking for Mead.)

Nestle CEO Paul Bulcke has often said publicly that Nestle is always open to acquisitions. And it has been an active dealmaker. On Jan. 4, 2009, it sold its 52% stake in Alcon, the world's largest eye-care company, to Novartis for $9.6 billion. Nestle has also agreed to buy Kraft Food's North American pizza unit for $3.7 billion. Nestle recently decided not to made a bid for Cadbury, the U.K. candy company that Kraft Foods (KFT) is pursuing.

Meanwhile, speculation swirls on Wall Street that Mead is apt to receive a buyout offer before long.

"The eventual acquisition of the firm is a real possibility," Terry Bivens, analyst at J.P. Morgan said in a recent report to clients. Mead could be a compelling target to a number of companies, he adds. "A deal could value the shares north of $60 a share, and still prove accretive to the suitors," says Bivens.

Silence All Around

Nestle and Danone could emerge as suitors, he says, although Nestle may face hurdles on antitrust issues in the U.S. and Mexico. On Jan. 4, Bloomberg News reported that analyst Robert Moskow of Credit Suisse had written in a research report that Mead would probably get a takeover bid from Nestle "at some point in 2010."

Lewis Rabinowitz, president of R. Lewis Securities, says he has accumulated Mead shares even before the split with Bristol-Myers because he expects the prospect that Nestle would acquire it to be more urgent once Mead became totally independent. "Mead's baby-food products will definitely enhance Nestle's children's food product line," argues Rabinowitz.

Asked about the buyout chatter, Mead Johnson spokesman Chris Perrille told DailyFinance the company doesn't comment on rumors. Likewise, a Danone spokesperson says only, "We don't comment on any market speculation." And Nestle hasn't returned a call requesting comment on a possible offer for Mead.

A "Compelling" Story

The global pediatric nutrition product business is huge and has had robust historical growth, says J.P. Morgan's Bivens. According to data presented by Mead at a meeting with investors, the annual growth rate may run at 7% through 2014, the analyst notes. Most of that growth is expected to come from Asia.

In China, for example, Mead will have established by the end of 2009 distribution outlets in 100 cities, up from 60 at the end of 2008. With each of those cities counting a population of about 1 million, the results "could prove meaningful," says Bivens. Mead has also started to penetrate markets in India and Russia, according to the analyst.

"Mead Johnson's long-term story is compelling,' says RBC Capital's Aaron. The company, he adds, has "the best long-term growth prospects among the large-cap food companies we cover, and we consider the stock a core holding for growth-oriented staples investors."

Indeed, Mead Johnson is the leader in one of the sweet spots in the food industry, and investors should find its stock a tasty and profitable investment, as well. A takeover bid, of course, would be especially nice icing on this cake.

Meet Gene Marcial at the World Money Show Orlando, Feb. 3-6, 2010, at The Gaylord Palms Resort.
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