CHICAGO (CN) – Stockholders of a baby formula company got fussy when its board agreed to a $16.6 billion merger with an overseas hygiene company, claiming in court that their shares are worth more than $90 apiece.
Christopher Kirkham filed a class-action lawsuit in Cook County, Ill., on Tuesday against Mead Johnson Nutrition Co., the pediatric nutrition company behind Enfamil infant formula, and Reckitt Benckiser Group, the English home and health giant set to absorb Mead.
Mead’s board members “breached their fiduciary duties of loyalty, due care, independence, good faith and fair dealing” when they agreed to the $16.6 billion deal, announced Feb. 10, which undercuts the 52-week high of Mead stock – $94.40 a share, the complaint states.
According to the complaint, the deal values Mead’s 184,723,441 outstanding common shares at $90 apiece instead of $94.40. That adds up to a total alleged undervaluation of $812.7 million.
Kirkham claims that, in late 2015, Mead undertook “Fuel for Growth,” a significant cost-cutting program that will lead to $180 million in savings by 2018, with $75 to $80 million in savings in 2016 alone because the program is running ahead of schedule.
Stockholder reports throughout 2016 touted the program’s effectiveness and emphasized the company’s expected growth in 2017, the complaint states.
“Mead Johnson is a solid company with strong prospects that is well on its way to successfully completing its Fuel for Growth program,” Kirkham claims.
Thus, the stockholders are dismayed at the merger, set to be completed in the third quarter of 2017.
Calling it a “hopelessly flawed process,” Kirkham says the merger was designed to maximize Reckitt’s gains at the expense of the holders of Mead’s 184 million outstanding shares.
Mead’s board and executives will receive $80 million in the deal for their 940,000 shares alone, along with “lucrative sums from their vested or unvested equity awards,” according to the complaint.
“The individual defendants are conflicted and serving their own financial interests,” Kirkham claims.
Further, because Mead is not a direct competitor of Reckitt, Mead will continue to operate as its own entity under new ownership, guaranteeing executives’ continued employment, the complaint states.
“In other words, Mead Johnson management sold out stockholders’ opportunity to get the highest price possible in order to secure employment positions for themselves,” Kirkham claims.
Even the merger advisor, Morgan Stanley, is conflicted – it “has worked extensively with Reckitt,” according to the lawsuit.
Mead also agreed to a “non-solicitation” provision preventing it from seeking a better offer, and to a $480 million fee if it terminates the merger, Kirkham says.
As of Thursday morning, Mead stock was worth $87.69 per share, but Kirkham claims it is set to grow thanks to new business ventures – the merger is simply poorly timed to realize this increase in value.
Kirkham is suing the companies and Mead’s board members for breaches of fiduciary duty, and seeks to halt merger proceedings until Mead finds a way to maximize shareholder profit.
Both companies released press statements announcing the merger, but have remained mum on the lawsuit on their official investor pages.
Christopher Perille, listed on Mead’s website as the media contact for the merger, declined via email to comment on the lawsuit.
Reckitt did not immediately respond to an email requesting comment.
Kirkham and the proposed class are represented by the Chicago office of Robbins Geller Rudman & Dowd LLP, with David Wissbroecker signing the complaint.