British consumer goods maker Reckitt Benckiser is in advanced talks to buy baby formula maker Mead Johnson for $16.7 billion, in a deal that would take it in a new direction and boost its business in Asia.
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Reckitt, which is best known for its cleaning and over-the-counter health products, said late on Wednesday it was in talks to offer $90 in cash for each Mead Johnson share, a 29.5 percent premium to the stock's closing price.
Shares of Mead Johnson, long rumoured to be a takeover target for Danone or Nestle, jumped 22 percent in after-market trading. At 0808 GMT, Reckitt shares in London were up 3.7 percent at 7,084 pence.
Mead Johnson, which makes Enfamil baby formula, has been seen as a bid target since being spun off from drugmaker Bristol-Myers Squibb in 2009, due in part to its big presence in Latin America and Asia, regions with fast-growing populations.
Reckitt, which makes Durex condoms, Nurofen tablets, Lysol cleaners and Scholl footcare products, was not seen as an obvious buyer given it is not in the baby food business and its overall food business is very small.
Still, Reckitt's focus on consumer health products, or health-related goods sold over the counter, makes Mead Johnson a good fit, analysts said.
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"It's a branded consumer proposition with healthcare-y attributes," said RBC Capital Markets analysts, adding the absence of any product overlap meant antitrust scrutiny would be minimal.
Reckitt's proposed price represents a multiple of 17 times Mead Johnson's estimated 2017 earnings before interest, tax, depreciation and amortisation (EBITDA), said analysts at Wells Fargo, falling short of the 20 times Nestle paid for Wyeth in 2012 and the 22 times Danone paid for Numico in 2007.
Still, the premium is in line with other recent consumer staples deals, and is appropriate given regulatory changes in China and price promotion, the analysts said.
Reckitt said it expected to finance the proposed deal through cash and debt.
"The parties are presently engaged in a period of due diligence and contract discussion," it said in a statement. Mead Johnson also confirmed the discussions in a statement.
Sources told Reuters in 2014 that Danone was interested in buying Mead Johnson but the French company has since agreed to buy WhiteWave, known for its soy- and nut-based milks, reducing the chances of a counterbid.
Speculation regarding a bid by Nestle recently resurfaced after a media report citing unidentified sources, yet Nestle's existing baby formula business would likely throw up antitrust concerns.
The Wall Street Journal first reported on the talks.
(Reporting by Martinne Geller in London, Sruthi Shankar in Bengaluru and Lauren Hirsch in New York; Editing by Gopakumar Warrier and Mark Potter)