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Well informed sources have told FT Alphaville that the French food company has brought in investment bank Lazard to work on a possible bid for Mead Johnson of the US.
Such a deal would create the world’s largest producer of baby milk formula and would build on Danone’s $16.8bn purchase of Dutch infant food company Numico two years ago.
Although Danone was accused of overpaying for Numico at the time, the acquisition has come to be regarded as a success due to the rapid growth of the baby food business, which has helped compensate for declines at Danone’s dairy and bottled waters businesses.
Sales of bottled water — including Evian and Badoit — are falling in western Europe and Danone has been battling declines in its dairy product sales by cutting prices.
An acquisiton of Mead Johnson would broaden the geographic spread of Danone’s baby food business, which is focused on western and eastern Europe. Around 60 per cent of Mead Johnson’s sales come from Asia and Latin America, and the rest from the US, where Danone currently has no presence.
Mead Johnson, best known for its Enfamil and Enfalac brands, was spun out of drug company Bristol-Myers Squibb (BMS) in February, in the first US initial public offfering of the year.
Before flotation, BMS sounded out Danone and several others companies including Pepsi, Nestle and Kraft to see if they would be interested in buying the business.
Mead Johnson shares have performed well since flotation, rising from their issue price of $24 to $43.35 at the close on Monday, valuing the Illinois company at almost $9bn.
However, it is unclear how Danone would finance a deal, which including a a takeover premium would likely cost around $12bn. Sources said that BMS would be unlikely to accept Danone paper in return for its 83 per cent shareholding in Mead Johnson.
To that end, Danone is said to have approached JP Morgan to see if they could provide a bridging loan for a possible cash and stock offer.
Although Danone raised €3bn through a surprise rights issue in May, and debts now stand at around 1.7 times EBITDA, analysts reckon the French company would need to make a disposal to help finance any deal.
One candidate would be its low-growth water business. Indeed, this would be similar to what Danone did in 2007 when it sold its biscuits division to Kraft and bought Numico.
But until the funding question is solved this deal will remain on the launch pad.
Danone have issued the following statement:
Danone denies today’s market speculation regarding Mead Johnson in the media In response to current speculation in the media, Danone would like to state the following: No discussions are currently taking place between Danone and Mead Johnson, nor has Danone hired any advisor or bank to advise the company on this topic.
It would seem this is deal will remain on the launch pad.