Bristol Myers' Mead Johnson Swap: Good Deal or Smarter to Wait?

Includes: BMY, MJN
by: Ken Caruso

I was reading this Fat Pitch Financials post and saw mention of Bristol Myers Squibb (BMY) offering their remaining ownership of Mead Johnson Nutrition (MJN) in exchange for BMY shares.

Bristol Myers did a public offering of MJN earlier this year and the stock has risen nicely since then. Mead Johnson was started in 1905 and acquired by Bristol Myers in the 1960s.

Quick info about MJN

From their website:

We are Mead Johnson Nutrition — a global leader in infant and children’s nutrition.
We are best known for our Enfamil® and Enfalac® families of infant formulas as well as for our regional children’s nutritional products, including Enfagrow®, Enfapro®, Enfakid®, EnfaSchool®, and Sustagen® in Asia, and Choco Milk® and Cal-C-Tose® in Mexico and Latin America.

I like Mead Johnson because its a boring steady business. Infant formula, while it will probably change in the future is not going away and families are likely to stick with known recognized brands for their children. I think brand recognition in infant formula is a good competive advantage.

The flip side of this of course is that something as serious as infant formula requires the company does not tarnish its brand by producing bad products. It is likely that a recovery from a massive problem with its product could put the company in dire straits. As an investor you should realize the potential risk of things like this regardless of how likely or unlikely they are. There has been one instance of Melamine being found in MJN and other infant formulas.

Info about the deal

Bristol Myers owns the majority of MJN (they sold some in a public offering this year). There is a tender offer being made in which BMY will provide up to 0.6313 shares of MJN for each share of BMY tendered. The actual ratio will be determined by an average price over a couple of trading days, in which they will provide $1.11 worth of MJN for each share of BMY (not to exceed to the 0.6313 number). The original tender was supposed to expire Dec. 14th 2009 at midnight. A recent SEC filling indicates they have extended the offer:

From the filling:

Bristol-Myers Squibb and Mead Johnson Announce Amendment and Extension of Exchange Offer
(NEW YORK, December 4, 2009) — Bristol-Myers Squibb Company (NYSE: BMY) and Mead Johnson Nutrition Company (NYSE: MJN) today announced that Bristol-Myers Squibb Company (“BMS”) has amended and extended its offer to exchange up to 170.0 million shares of common stock of Mead Johnson Nutrition Company (“MJN”) for outstanding shares of BMS common stock that are validly tendered and not validly withdrawn at an exchange ratio determined by a formula described in a registration statement filed by MJN on Form S-4 (Reg No. 333-163126).
BMS is amending the offer by:

•Increasing the upper limit on the exchange ratio to 0.6313 shares of MJN common stock per share of BMS common stock from 0.6027 shares of MJN common stock per share of BMS common stock; however, the final exchange ratio may be less than the upper limit;

•Extending the exchange offer’s expiration to 12:00 midnight, New York City time, on December 17, 2009, unless extended or terminated, from December 14, 2009; and

•Amending the current expected three-day period over which the final exchange ratio will be determined to December 11, 14 and 15, 2009 (which previously was expected to be December 8, 9 and 10, 2009).

The final exchange ratio will be announced by press release by 9:00 a.m., New York City time, on the trading day immediately preceding the expiration date. BMS and MJN currently expect to issue that press release by December 16, 2009, unless the exchange offer is extended or terminated.
As of December 3, 2009, approximately 1,055,000 shares of BMS common stock have been tendered.

Some Risks

  • Dramatic changes in the stocks market price in the near future could change the spread.
  • Only 1,055,000 shares have been tendered to date, hence the extension, this could get extended again, or as stated in the filling it could potentially get terminated.

Potential Kicker for BMY holders

  • In the conference call they mention that if certain conditions are met and there are remaining MJN shares left over, they might distribute those to shareholders. I believe one of the requirements was that at least 145 million shares are distributed. Looks unlikely at this point.


A quick look at the DCF valuation using the spreadsheet prices it at about $20 fair value assuming 5% growth and 9% discount rate. It currently trades somewhere around $41 a share. One thing to keep in mind here is that due to the fact that MJN has only recently gone public there is not very much historical data about their growth. If I was really interested in this situation I might research Bristol Myers' annual reports for more information. For the sake of argument I picked 5% as a somewhat conservative growth rate (click on chart to enlarge).
MJN DCF Valuation

Overall it seems like MJN is still a bit overpriced even if you take into account that you could get a 10% discount via the tender offer, unless there is something that can indicate they will grow free cash flow at a higher rate.

However if you look at this from an arbitrage perspective it is a potential 10% profit with a very short time frame. This assumes the market continues to value MJN at current levels or higher. If you want more information on this deal I would suggest following the link at the bottom of this post for the online webcast of the conference call.

What about BMY ()?

Bristol Myers Valuation

On the flip side BMY appears to be undervalued. I pulled it up on the spreadsheet and with 25% MOS (good moat), 9% discount and 0% growth it shows a 27.87 per share value and buy price of $21 to get a margin of safety of 25%. If you bump the growth up to 3% the numbers start looking reasonable. The question is will they grow FCF? Well here are some things to keep in mind:

1. They are divesting themselves of all non-core units (hence the MJN spin off) so they will be more focused on their biopharma products. This has been a long standing plan that they have been following through on.

2. Shares that will be retired in the MJN tender will reduce their dividend payout. In the conference call BMY said that the dividend reduction will be larger than loss of dividends they currently get on their MJN shares.

3. Over the past 10 years FCF has been a bit of a roller coaster, but from 2006 to 2008 it has been growing which might mean that management has their act together more and their plan for focusing on biopharma is working.

Useful Links:

Bristol Myers Investor Relations

Listen the to MJN split off conference call

Most recent related SEC filling at the time writing


I think MJN is overpriced and BMY could warrant further investigation. That being said I might take a small position in MJN to go through the exchange process as a learning experience so I know what to expect in future opportunities.

Author's Disclosure: This is not a recommendation to buy or sell securities or a replacement for your own investment research and due diligence. I have no positions in MJN or BMY at the time of this writing.