UPDATE: Mead Johnson IPO Up 8% After Increasing Deal Size

(Updates with comments from Mead Johnson Chief Financial Officer Peter G. Leemputte)

By Lynn Cowan
Of DOW JONES NEWSWIRES

Baby formula maker Mead Johnson Nutrition Co. (MJN) gave the U.S. IPO market a welcome jump-start Wednesday, with its stock opening up 8%.

The Evansville, Ind., company, which is being carved out from parent Bristol-Myers Squibb Co. (BMY), is the first initial public offering to hit the American market since online college Grand Canyon Education Inc.'s (LOPE) debut 12 weeks ago. In its opening trade, Mead Johnson changed hands at $26 a share, up from its IPO price of $24; it was trading recently at $26.24 a share, up 9%. Bristol-Myers, which plans to retain an 80% stake in Mead Johnson post-IPO "for the foreseeable future," was flat at $22.29.

Mead Johnson sold 30 million shares - 5 million more than expected - and priced at the high end of its expected $21 to $24 range, the first deal to hit the upper bound since Colfax Corp. (CFX) went above its range last May. Mead Johnson's $720 million offering, lead-managed by Citigroup Inc. (C) and Morgan Stanley (MS), is the largest U.S. IPO since American Water Works Co. (AWK) raised $125 billion last April.

It was a good way to kick off the 2009 IPO market. Although two other deals were also expected to trade Wednesday, neither security specialist O'Gara Group Inc. nor renewable fuel and fertilizer company Changing World Technologies Inc. (CWL) managed to price.

O'Gara's offering has been moved to day-to-day status, meaning it will come only if the company and investors can agree on pricing; Changing World's is tentatively scheduled to begin trading Thursday. Changing World on Wednesday morning cut its price range by $3 a share, and investors say that O'Gara's range will likely also be cut.

Bankers and analysts alike had expected Mead Johnson to be well-received by investors, given its financial history and focus on a consumer segment that some believe is more buffered from economic swings. Best known for its Enfamil formula, Mead Johnson has a multiyear string of growing sales and earnings that drew investors in. It's also planning to pay dividends at a time when some established companies are suspending theirs, with the initial quarterly rate set at 20 cents a share.

"The profit margins in pediatric nutrition are higher than in an overall pharmaceutical company because of the faster lead time for rolling out new products, and lower research and development costs," said Ben Holmes, publisher of research site Morningnotes.com.

A clear risk for investors is how well premium formulas like Enfamil will continue to fare in an economic slowdown. In its prospectus, the company warns it believes that lower-priced private label and store brand products have gained market share in the last 12 months as consumers shifted their purchases to less expensive brands. It also said that operating results for 2009 may be adversely impacted by the general economic downturn, and the first quarter in particular may be down from the same period of 2008 because of higher commodity prices and higher advertising, promotion and sales force expenses.

But the effect of higher commodities pricing will ease after the first quarter, with comparisons against 2008's primary commodity - dairy - improving through 2009, Mead Johnson Chief Financial Officer Peter G. Leemputte told reporters during a conference call on Wednesday.

Leemputte added that the company hadn't seen any lessening of global demand for its products in the fourth quarter of 2008 despite the worldwide economic slowdown, and is poised to benefit from demographic trends that have led to more formula sales in emerging economies such as Latin America and Asia, its two largest sales regions.

"This IPO places us in the position of being the only global company to focus exclusively on pediatric nutrition," said Leemputte.

Bankers and analysts said infant formula is one of the few products that can garner solid consumer loyalty, particularly in the wake of media reports about tainted baby formulas sickening infants in China. Mead Johnson doesn't use dairy or other protein-related raw ingredients from China, and it was able to raise prices in 2008.

"It's more difficult for consumers to shift to lower quality products, when those products involve the two staples of health and nutrition," says Marino Marin, a managing director at investment bank Gruppo Levey & Co., who believes brand-switching is only a "moderate" risk for Mead Johnson.

Mead Johnson also operates a children's nutritional line for older kids that is growing at a fast clip, says Scott Sweet, managing director of Tampa research firm IPOBoutique.com.

"Mead Johnson is the most aggressive children's nutrition company in terms of research and development. It is always coming up with new product offerings, and that could help to offset some minor brand erosion from cheaper general-use formulas in the marketplace," said Sweet.

-By Lynn Cowan, Dow Jones Newswires; 301-270-0323; lynn.cowan@dowjones.com