Reckitt Benckiser (RB.L) has agreed to buy U.S. baby formula maker Mead Johnson Nutrition MJN.N for $16.6 billion, giving the British consumer goods company a new product line and expanding its presence in developing markets.
Reckitt, the maker of Lysol cleaners, Durex condoms and Mucinex cold medicine, said on Friday it will pay $90 in cash for Mead Johnson shares, a 30 percent premium to their close on Wednesday last week, the day before Reckitt said it was in advanced talks with the maker of Enfamil baby formula.
Including Mead Johnson's debt, the deal is worth $17.9 billion and Reckitt Benckiser said it would finance the acquisition with debt underwritten by Bank of America Merrill Lynch, Deutsche Bank and HSBC.
Reckitt - whose business has been hurt by a safety scandal in South Korea, slowing emerging markets and a "failed" Scholl product - also reported weaker than expected sales in the fourth quarter due to declines in Europe and North America.
The company also forecast 2017 sales growth below some analyst estimates, citing the ongoing impact of those issues and a challenging macroeconomic backdrop.
Reckitt's shares were down 2 percent at 1542 GMT in London, while Mead Johnson was up 5 percent at $87.2 in New York.
Reckitt Chief Executive Rakesh Kapoor said the deal was "a significant inflection point" for the company, as its biggest acquisition will nearly double the size of Reckitt's faster-growing consumer health business and expand its developing market presence by two-thirds.
China will become Reckitt's second-largest market behind the United States following the acquisition of Mead Johnson, which was spun off from Bristol-Myers Squibb (BMY.N) in 2009.
Mead has long been seen as a potential takeover target for Danone (DANO.PA) or Nestle (NESN.S), but not Reckitt, since the British company has never been in the baby formula market.
"You might be surprised but we are absolutely not surprised. We've been looking at this for a number of years now as we have indeed other companies," Kapoor told reporters.
Still, analysts saw the choice of Mead Johnson as proof that other, more obvious deals were unavailable in areas Reckitt has been targeting such as over-the-counter medicines.
"The deal would seem to tick the 'financial logic' rather better than the 'strategic logic', but opens up a lot of opportunities in a very attractive category," said analysts at Credit Suisse.
Mead Johnson's shares had fallen by a third over the past two years, as it has lost market share in China due to increased competition and changing consumer habits.
Steve Clayton, manager of the HL Select UK Shares fund at Hargreaves Lansdown, which owns shares of Reckitt, said the poor performance was a risk.
"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," Clayton said.
Reckitt said its goal was for the Mead business to perform at the upper end of an estimated annual sector growth rate of 3 to 5 percent in the medium to long term.
The deal should add to Reckitt's earnings in the first full year after completion and by the third year it is expected to boost earnings per share by a double-digit percentage, with 200 million pounds of annual cost savings.
Kapoor said there been no talks yet about job losses at the combined businesses and no decision had been taken regarding six Mead Johnson executives, who would be owed a total of $31.7 million if they were let go within two years of a takeover.
Reckitt's fourth-quarter revenue was 2.76 billion pounds, up 1 percent on a like-for-like basis, it said on Friday. Several analysts said the consensus was for growth of 1.7 percent.
For the full year, like-for-like revenue rose 3 percent and reported earnings climbed 6 percent to 256.5 pence per share.
Reckitt forecast like-for-like sales growth of 3 percent on a stand-alone basis for 2017, below analyst expectations, and reiterated a medium-term target of "moderate" margin expansion.
The company said the issues that hurt it in 2016 would persist into the first half of 2017.
Subject to shareholder and regulatory approvals, Reckitt expects the Mead Johnson deal to close by the end of the third quarter. The British company said it expected to retain a strong investment grade credit rating following the deal.
Robey Warshaw and Bank of America Merrill Lynch were Reckitt's lead financial advisers, while Deutsche Bank was a financial adviser, corporate broker and sponsor. HSBC was also an adviser to Reckitt. Mead Johnson was advised by Morgan Stanley and Goldman Sachs.
(Additional reporting by Pamela Barbaglia)