For the Swiss stalwart the combination, first reported by Street Insider last week, would be beneficial, especially in China, but for Nestle's new CEO the merger could be too soon.
In theory the tie-up between Mead Johnson and Nestle makes sense. Nestle is the global leader in baby nutrition and Mead Johnson is No. 3. Like the Anheuser-Busch InBev (BUD) and SABMiller "Mega-Brew" merger last year, a Nestle-Mead Johnson combination would create a baby food titan.
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Nestle is surely interested in Mead's exposure to the profitable Asian market.
"We think this would be an attractive addition to Nestle's China Infant Formula business," Jefferies International analysts said in a note published last week. "Mead Johnson's focus on direct sales rather than 'C2C' over the past three years has put it ahead of the curve in managing channel shift. Leveraging Mead Johnson's distribution network would give Nestle an advantage over local and international competitors in terms of absolute points of sale and the speed at which it can track that shift."
A combined company would hold 22% of China's infant nutrition market.
The deal has also become less expensive in recent months. Mead shares have fallen significantly since the possibility of a deal with French nutrition company Danone SA was reported in March. Mead Johnson stock fell after Danone announced its $12.5 billion deal for WhiteWave Foods Co. effectively taking it out of the running for a takeover.
Mead stock has fallen 3.3% in the past three months, closing at $74.84 on Friday and currently trading around $74.75. The company reports its fourth-quarter earnings on Thursday.
Even though the deal looks cheap now, it will likely trigger competition concerns among regulators worldwide. Jefferies points out that Mead Johnson holds 44% of the infant nutrition market in the U.S. and Nestle has about 12%. Meanwhile, Nestle has 53% of market share in Mexico and Mead holds 15%.
"Resultant concentration ratios are well outside the [Federal Trade Commission's] merger guidelines and would result inevitably in disposals amounting to a third of MJN's sales. Complicating this would be the fact that MJN's U.S. business has been underperforming of late," Jefferies analysts said.
There is no doubt that new CEO Ulf Mark Schneider is acquisitive, he has been deemed "a bit of an M&A junkie," by analysts at Joh. Berenberg, Gossler. With Schneider at the helm, Germany's Fresenius (FMS - Get Report) made more than a dozen acquisitions and was said to be the leading bidder to buy Pfizer's (PFE - Get Report) pump and devices business.
Schneider started as Nestle CEO on Jan. 1 and is the first outsider to run the company since 1922. He is expected by many in the analyst community to shake things up, with expectations of acquisitions and disposals and bring a fresh pairs of eyes to the board. But the Jefferies analysts warn that "this feels like a too early, too complicated move" for Schneider.
Neither company have commented on the report.