Glenboden M & A Originations

Omega Pharma to re-start acquisition drive with Mead Johnson purchase?

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Origination Status deal origination following industry rumours, December 2007
Asset Mead Johnson Nutritionals (USA), no.2 domestic infant formulas business
Buyer candidates include Heinz, Kraft, Omega Pharma
Seller Bristol-Myers Squibb (USA), global pharma group
Buyer Rationale significant global opportunity in the infant health business
Seller Rationale divestment of mature Health Care Group, focus on Bio-Pharma core business
NBs Heinz lost to Nestle, in bid to acquire Gerber baby food business from Novartis
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Heinz wanted to acquire Gerber, earlier this year, to add this brand’s 80% share of the US baby food business to Heinz’s strong European counterpart. However, Gerber was a ‘must have’ acquisition for Nestle, which equates to a higher valuation than anything Heinz could offer; Nestle won the deal by paying an EBITDA multiple of nearly x20. With Danone having more recently bought Numico, one might say that it’s now Heinz’s ‘turn’ to make a big acquisition in this category. But is Heinz ready and willing for such a transformational deal ? We think not, and that a 'blind -side' offer could come from Omega Pharma, who could have both momentum and rationale on its side.

Unlike Gerber, or Heinz’s existing baby foods business in Europe (Plasmon, Farley’s etc), Mead is a healthcare business for infants, notably in feeding formulas for newborns, and not a traditional baby food business. That’s why, strategically, it’s much more transformational and Heinz, still positioned as a premium foods business delivering superior taste (more than nutrition), might not yet be ready for that.

Mead Johnson would create radical changes at Heinz on nearly all levels :

- in R&D (clinical trial and health data competence, regulatory interface);

- in marketing (brand with consumer intimacy, healthcare marketing);

- in sales channels (healthcare institutions, pharmacies, maybe homecare).

Although Heinz is now back on the acquisitions trail, it’s still in the wake of a major restructuring plan. Besides which, the valuation is likely to be very high indeed, at a significant premium to even the fastest -growing regular foods businesses. Nestle paid nearly x20 EBITDA for Gerber, which is predominantly a baby food business (with some infant healthcare capability). However, given Mead’s healthcare focus, making it more similar in profile to Numico, the price tag may be closer to the nearly x30 EBITDA paid by Danone for that company. In Sales multiple terms we’re talking somewhere between x3 and x5.

Kraft has also been tipped as a buyer of Mead Johnson. Financially they might be better placed than Heinz but, strategically, Kraft doesn’t even have a baby food division (its five divisions are snacks, beverages, cheese & dairy, convenient meals, grocery). It has not declared any interest in creating a baby food division, let alone in transforming itself in the direction of healthcare. They’re only at the ‘better for you’ level, when it comes to that whole ‘health and wellness’ thing.

Our assumption is that Mead Johnson’s owner, Bristol-Myer Squibb, is driving this process. They’ve already declared the review of strategic options, with respect to their Health Care Group, which they see as only a ‘cash cow’ next to their strategic Bio –Pharma activities. Our guess is that Heinz and Kraft are saying ‘not yet’ to BMS. Maybe we’ll be reviewing this deal sometime again next year. Or maybe some fast growing ‘nutraceutical’ company will acquire Mead Johnson, instead. How about Belgium’s Omega-Pharma, with its consumer OTC focus and ambitions beyond Europe ?

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