Zurich - Swiss food group Nestlé is to buy US drugmaker Pfizer’s infant nutrition business for $11.85bn, beating out French rival Danone in the battle for dominance of baby food in fast-growing emerging markets.
Nestlé, the world’s biggest food company, was already seen as likely to win the battle due to its deep pockets after it sold its stake in eyecare group Alcon to Novartis, and has refrained from announcing a new share buyback programme.
The fight for the Pfizer unit, which makes 85% of its sales in emerging markets, intensified last week with the price escalating sharply from bids around $10bn after Danone was reported to have raised its offer on Friday.
The acquisition, which is subject to regulatory approval, is expected to close in mid-2013 and will help Nestlé extend its lead in the infant formula market.
“The price tag is high; however, Nestlé is securing a high growth/margin business with high exposure in the emerging markets.
"China will become the No 3 market for Nestlé overall,” said Vontobel analyst Jean-Philippe Bertschy.
Nestlé said the deal would be add to earning per share from the first year, and would allow cost synergies of $160m. Bertschy estimated the deal would add about 0.5% to earnings per share in the first year, and 1.5% in the following years.
Nestlé shares, which hit an all-time high of 57.50 francs ahead of solid first-quarter results last week, fell 3.06% to 55.35 francs at 08:00 GMT as they traded ex-dividend, compared with a 1.11% weaker European food and beverage index.
“Although the growth profile, attractive margins and emerging market exposure makes this a compelling asset, we believe that the multiples being some way ahead of market expectations may dampen near-term enthusiasm for the deal,” said Citi analyst Robert Dickinson.
The $11.85bn value of the deal was above the $10bn which had been expected, and ahead of previous Nestlé deals in the sector when it paid 15.7 times for Gerber and 17.6 times for Novartis Nutrition, according to Citi.
Chinese market key
The Pfizer unit is a high-growth business built on its top SMA Gold brand. Some 60% of sales are in Asia, 30% in Europe, largely Britain, and 10% in Latin America.
It ranks No 5 globally in the infant milk formula market - the world’s fastest-growing packaged food category - after Nestlé, Mead Johnson, Danone and Abbott Laboratories, with a quarter of sale in the buoyant Chinese market.
The $6bn Chinese market is key as it is set to double to $12bn by 2016, having grown at more than 20% a year over the last five years to feed 16 million new births a year.
Mead leads the Chinese market with a 16% share followed by Danone with 14%, Pfizer is fifth with an 8% share, while Nestlé has just 4%.
Nestlé’s roots go back to the 1860s development by Henri Nestlé, a pharmacist, of the first infant formula for babies whose mothers who could not breastfeed.
“Pfizer Nutrition is an excellent strategic fit and this acquisition underlines our commitment to be the world’s leading nutrition, health and wellness company,” CEO Paul Bulcke said on Monday.
The Vevey-based firm expects the acquisition will generate sales of $2.4bn this year and boost margins, thanks to its large exposure to fast-growing emerging markets.
Nestlé, which expects emerging markets to account for half of sales by 2020 from 41% last year, has been an active player in recent emerging markets merger activity, taking stakes in two Chinese food companies.
“The deal makes strategic sense, it really was Nestlé’s deal to lose as it very much wanted to add to its Asian business and boost growth and margins,” said Kepler analyst Jon Cox.
“The price being paid seems quite high - by my calculations it’s at 22 times core earnings, almost as high as Danone’s infamous 2007 acquisition of Numico.”
Danone paid €12.3bn in 2007 for Dutch food group Numico, at the time Europe’s largest baby food producer, paying a similar multiple, a price many analysts said was too high.
Pfizer put its infant nutrition and animal health businesses up for sale last July as it looks to focus on its core pharmaceuticals business.