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Is The Market Betting On A Mead Johnson Takeover?

Is The Market Betting On A Mead Johnson Takeover?
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Mead Johnson Nutrition CO (NYSE: MJN) shares are up over 7 percent in the past month, outperforming most peers and the broader market averages by several points.

Outside of a general rotation into defensive stocks, recent strength in Mead Johnson might be attributed to market rumors.

'Interesting' Options Activity And Sensical Logic

Options on the stock have the highest implied volatility since 2011, activity a recent Deutsche Bank analysis called "interesting." This activity has come amid "short-dated range-bound behavior," Deutsche's Lon Parisi wrote, adding that "takeout chatter" has surrounded the company several times.

Parisi's comment comes weeks after Bloomberg's Tara Lachapelle wrote about the "perennially speculated" Mead Johnson. France-based Danone is the "most probable buyer," she added, explaining that logic behind a merger makes sense "more than ever."

A cash-and-stock buyout offer with at least 25 percent cash seem do-able to Lachapelle, especially given Mead Johnson's valuation after a 30 percent selloff over the past 12 months.

What's Next?

Only time will tell if both sides ultimately agree with Bloomberg's line of reasoning. Earlier this month, an anonymous tip told Benzinga Danone was close to a takeover of Mead Johnson after a stall in talks.

According to the source, both sides are discussing a takeover that values Mead Johnson at $18 billion, a 30 percent premium to its current market capitalization.

While shares are up amid the "chatter" analysts refer to, it's worth noting that Mead Johnson shares remain down 10 percent since Bloomberg first reported in April 2014 that a combination between both companies made sense to Wall Street.

The Consumer Staples Select Sector SPDR ETF (NYSE: XLP) has significantly outperformed the stock by almost 30 percentage points over that time, implying the market may not think a takeover is any more likely than it was two years ago.

Still, the value is better than it once was. Mead Johnson shares traded at a trailing 12-month Price-to-Earnings multiple of 25 in April 2014; they now trade near 22 times earnings.

Mead Johnson and Danone couldn't be reached for comment.

Posted-In: Analyst Color Long Ideas News Health Care Rumors Options M&A Top Stories Best of Benzinga


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