Mead Johnson Tumbles as Danone Goes for Yashili in China - Analyst Blog

Pediatric nutrition products provider Mead Johnson Nutrition Company's (MJN) shares dropped 4.1% to close at $99.31 on Friday, following Danone's decision to purchase a 25% stake in Chinese infant milk formula maker – Yashili International. Based in France, Danone is the world's largest yogurt maker.

This acquisition will allow Danone to strengthen and expand its foothold in the infant milk formula (IMF) business in the People's Republic of China (PRC). Danone will invest $550 million toward this deal, although the acquisition remains subject to the approval of Yashili's shareholders. The fate of the transaction is expected to be finalized in the upcoming months.

Currently, China – as an emerging market – is developing rather fast with new channels and consumer segments surfacing rapidly. Per Euromonitor data, Mead Johnson sold 11.1% of its baby formulas in China last year, ahead of Nestle's 10.6% and Danone's 10.1%. This has made Mead Johnson the largest player in the Chinese baby food market with a current market value of about $20 billion.

Danone, on its part, has been trying hard to restore its Chinese infant formula business since last year after few bribery claims and a false alarm over food safety led to a decline in its profits from the Chinese market. The Yashili acquisition should help Danone reinstate its position in the Chinese baby food market, offering strong competition to Mead Johnson.

Earlier this month, Danone had reportedly expressed its intention to acquire Mead Johnson, which had resulted in an upswing in the latter's stock price. Clearly, investors had considered this a positive move in the best interests of the company. However, chances of such a takeover now appear bleak, given Danone's huge investment plans for the Yashili acquisition. As a result, Mead Johnson's shares are now trading in the red.

Currently, Mead Johnson has a Zacks Rank #3 (Hold). Better-ranked stocks in the medical products industry include GW Pharmaceuticals plc (GWPH), Abaxis, Inc. (ABAX) and Boston Scientific Corp. (BSX). While GW Pharmaceuticals sports a Zacks Rank #1 (Strong Buy), both Abaxis and Boston Scientific hold a Zacks Rank #2 (Buy).