A takeover of Mead Johnson Nutrition Co. was always a matter of when, not if. But its current suitor, Reckitt Benckiser Group Plc, hadn’t been the obvious choice. Investors should take this as a reminder: If you think you can guess exactly how this year’s big, highly anticipated food M&A will shake out, think again. We could see more surprises — like Kraft Heinz’s next target, perhaps? More on that lower down.
But first, the news: Reckitt Benckiser, known for Lysol disinfectant spray and Durex condoms, is in talks to buy Glenview, Illinois-based Mead Johnson, maker of Enfamil baby formula, for $16.7 billion in cash. Gadfly crunched the numbers here and explained how this marks somewhat of a strategic shift for the U.K. company.
Nestle SA of Vevey, Switzerland, and Paris-based Danone SA — the heavyweights in the infant-formula market — were long seen as the most likely acquirers of Mead Johnson. Reckitt’s unexpected foray here could signal the return of an old theme in dealmaking: diversification. It means that merger talks could draw unforeseen interlopers desperate for deals in lieu of strong organic growth prospects.
The recent years-long trend has been to slim down and become more focused — that’s the activist mantra. (Mead Johnson itself was spun off from drugmaker Bristol-Myers Squibb Co.) After all the breakups and asset sales, though, revenue growth remains elusive for many, which could drive companies to branch back out again. For the three months ended September, Reckitt posted its weakest core organic-sales growth in five years, according to research by Bloomberg Intelligence.
Following this logic, other less obvious bidders may still surface for Mead Johnson. They could include Unilever; soda behemoths PepsiCo Inc. and Coca-Cola Co.; snacks maker Mondelez International Inc.; or even pharmaceutical giants such as Johnson & Johnson and the consumer-health joint venture between GlaxoSmithKline Plc and Novartis AG.
So, what does all this have to do with Kraft Heinz Co.? Well, Mead Johnson isn’t the only food deal of 2017 that may come with a twist.
Ask anyone what will be Kraft Heinz’s next transaction and they’ll probably say Mondelez. In some ways it makes sense, and Mondelez shareholder Pershing Square Capital Management — Bill Ackman’s hedge fund — is certainly rooting for a deal after the terrible two years it’s suffered due to other bad investments. But Kraft Heinz’s M&A masterminds, 3G Capital (with financial assistance from Warren Buffett’s Berkshire Hathaway Inc.), have a clear modus operandi: cutting costs to expand margins. In that case, General Mills Inc., Kellogg Co. and Campbell Soup Co. have plenty of fat to trim, as I noted here in November.
Plus, who’s to say 3G and Buffett have their eyes on another food company? There are bloated businesses in tangential industries.
Furthermore, Mondelez has been scoping out its own deal for Hershey Co. While the chocolate company appears an unwilling seller, I wouldn’t completely rule out a transaction between those two yet. Mead Johnson could also be a sensible target for Mondelez and offers a means of diversifying what is mainly a not-so-healthy snacks company (remember, healthy foods are the fad right now). The point is, Kraft Heinz-Mondelez is not a done deal — not least because it hasn’t even been announced yet, but also because there are other worthy targets out there and 3G and Buffett like to be unpredictable.
Some investors are awaiting a merger of ConAgra Brands Inc. and Pinnacle Foods Inc., too. But I’ve argued that Pinnacle is better suited as a buyer than a target, for now. There’s also a new wrinkle here: With Bob Evans Farms Inc. selling off its restaurants, its leftover packaged-food business could be attractive to ConAgra. (Bloomberg Intelligence analyst Michael Halen notes that Post Holdings Inc. is also a logical buyer for Bob Evans.) ConAgra has worked hard to restore its reputation after doing what was probably one of the industry’s worst deals ever, so it needs to pick its next target carefully.
M&A this year could be full of unexpected developments like Reckitt-Mead Johnson. Best to think outside the cereal box.
Tara Lachapelle is a columnist for Bloomberg View.