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UPDATE 3-Danone says not holding talks with Mead Johnson

* Danone denies market speculation on Mead Johnson

* Says did not hire any adviser or bank on the topic

* FT’s Alphaville says Danone targets Mead Johnson

* Mead Johnson reduces gains after Danone’s denies report (Adds analyst comment, food deal making background)

By Noelle Mennella and Brad Dorfman

PARIS/CHICAGO, Sept 29 (Reuters) - French food group Danone DANO.PA said on Tuesday it was not holding talks with U.S. baby formula maker Mead Johnson Nutrition Co MJN.N and was not seeking any advice on the issue, knocking down a report that had pushed Mead shares as much as 16 percent higher.

Danone issued the statement after the Financial Times website’s Alphaville section said Danone had brought in investment bank Lazard to work on a possible bid for Mead Johnson worth around $12 billion that would create the world’s largest producer of baby milk formula.

“In response to current speculation in the media, Danone would like to state the following: No discussions are currently taking place between Danone and Mead Johnson.

“Nor has Danone hired any advisor or bank to advise the company on this topic.”

Mead Johnson shares surged to a lifetime high of $50.35 earlier on Tuesday before trading back down to $43.70 following Danone's statement. The company is 85 percent owned by pharmaceutical company Bristol-Myers Squibb Co BMY.N, which spun it off earlier this year.

Officials from Mead and Bristol-Myers declined to comment on the Alphaville report.

Investor interest in potential food sector mergers and acquisitions has picked up since Kraft Foods Inc KFT.N said earlier this month it has proposed buying chocolate maker Cadbury Plc CBRY.L in a bid currently valued at $15.75 billion.

GROWING BABY SEGMENT

Danone’s baby foods business, which includes brands such as Bledina and Numico, is largely focused in Europe, while Mead Johnson is one of the largest U.S. players with its Enfamil baby formula.

The global baby formula business is expected to be a $23.4 billion business in 2009, growing at a compound annual rate of 11.1 percent since 2004, according to Euromonitor International.

Much of the growth comes in developing markets, where more consumers are starting to use baby formula. Companies have also been developing products geared toward toddlers.

Morningstar analyst Debbie Wang said she would not be surprised if Mead Johnson eventually becomes an acquisition target.

“I actually think it would probably be a better fit with some of these consumer packaged goods companies” than with Bristol-Myers Squibb.

But she also noted that marketing baby formula is different than selling jars of baby food because in international markets because of concerns about encouraging mothers to use formula instead of breast milk.

Marketing is instead focused on pediatricians, who recommend the brands to parents, Wang said. That could make Mead Johnson a better fit with a company such as Colgate- Palmolive Co CL.N, which sells consumer products, but also is experienced in marketing to the medical community.

One banker said that, when Danone raised 3 billion euros in its first capital increase in 22 years in June, there was speculation about whether it was building a war chest.

“If Danone moves now, it could be because they are taking advantage of a favorable environment for M&A,” the banker had added.

Danone shares closed down 2.07 percent at 40.50 euros on Tuesday. (Reporting by Noelle Mennella, Dominique Vidalon and Brad Dorfman; additional reporting by Victoria Howley and Ransdell Pierson; editing by Rupert Winchester, Michele Gershberg and Andre Grenon)

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