French food and bottled-water company Danone SA (BN.FR) Tuesday denied market speculation that it is in discussions with Mead Johnson Nutrition Co. (MJN) or that it has hired any adviser or bank to advise the company on the topic.

Earlier Tuesday, the Financial Times Alphaville blog reported that Danone had hired investment bank Lazard to work on a possible bid for infant-nutrition group Mead Johnson. Alphaville said the takeover would likely cost Danone $12 billion.

Danone's shares fell after the report late in Tuesday's session to close down 2.1% to EUR40.50, underperforming the French benchmark index the CAC-40, which closed off 0.3%.

Kathryn Chieger, head of investor relations at Mead Johnson, said the company doesn't comment on market rumors or speculation.

Shares of Mead Johnson rose to a new high of $50.35 earlier Tuesday, up 16% from Monday's close. As talk of a possible deal with Danone faded, the stock was recently at $43.50, up 0.4% from the previous close.

The stock started coming off its highs after CNBC's David Faber, citing bankers close to both companies, reported that Danone might be interested in making a bid for Mead Johnson if the latter's majority owner, Bristol-Meyers Squibb Co. (BMY), were interested in selling, but no such interest now exists.

A Bristol-Meyers spokesman had no comment.

The timing of a deal would have been quite odd and the price would have been too high, an analyst commented.

"Danone would have had to sell something before buying as the debt plus the Spanish put options would have possibly been unmanageable," added the analyst, who wished not to be named.

Danone has EUR2.9 billion of financial debt related to put options granted to minority shareholders in addition to EUR4.11 billion in net financial debt, as reported at the end of the first half.

The analyst added that there is, nevertheless, strategic merit in a tie up with Mead Johnson in the medium term as Mead Johnson has interesting emerging-market exposure and presence in the U.S.

"While we could see some strategic sense in such a deal for Danone, we recognize a deal of this nature would significantly stretch the Danone balance sheet if done all cash," JPMorgan analyst Pablo Zuanich noted in an emailed statement. JPMorgan rates Danone overweight.

In 2007, the French company sold its biscuits division and bought Dutch infant and medical nutrition group Numico soon afterwards, a crucial step on the road to becoming what Danone describes the only food group totally focused on health.

With just over 19% of Danone's total EUR7.52 billion revenue in the first half of this year, infant nutrition has overtaken bottled water to become Danone's number-two division by sales, behind its main dairy division.

Adding Mead Johnson's operations would increase Danone's global baby formula share to 30% from 14% and it would leap frog Swiss-based rival Nestle SA (NESN.VX), JPMorgan's Zuanich noted.

Mead Johnson, Glenview, Ill., was formerly a wholly owned subsidiary of Bristol-Meyers. The New York-based drug maker spun off Mead Johnson in February, when the maker of infant formula and nutrition products completed an initial public offering.

Bristol-Meyers has recently pursued a strategy of shedding non-pharmaceutical assets, such as wound-care and medical-imaging units, and using the proceeds and its cash hoard to build out its drug pipeline and product portfolio.

Company Web site: www.danone.com

-By William Horobin, Dow Jones Newswires; +33-1-4017-1740; william.horobin@dowjones.com