Nestle's $28.1 Billion Payday Gives It Google-Size Cash Pile

Nestle SA has a $28.1 billion question and investors have plenty of answers.

Europe’s largest company by market value could buy almost any publicly traded food asset with cash when it gets paid for its Alcon Inc. stake in the second half. Investors want the maker of KitKat bars and Haagen-Dazs ice cream to expand in emerging markets to catch up with Unilever, which gets about half of its sales in developing countries.

“The world is their oyster, but the pearls can’t be too expensive,” said Wendy Trevisani, a fund manager at Thornburg Investment Management in Santa Fe, New Mexico, which has more than $700 million invested in Nestle shares. “They’re clearly a laggard in emerging markets.”

Nestle will receive $28.1 billion from Novartis AG for its majority stake in Alcon, the maker of Opti-Free contact lens cleaners, giving it a cash pile exceeding the $26.5 billion that Google Inc. had on its books at the end of March. The Swiss company is starting a new 10 billion-franc buyback program, though Nestle would rather invest in its business or make acquisitions, Chief Financial Officer Jim Singh said June 22.

About 1 billion consumers in emerging markets will increase their incomes enough to be able to afford Nestle products within the next decade, the Vevey, Switzerland-based company estimates. The world’s largest food company gets about a third of its revenue from emerging economies and Chief Executive Officer Paul Bulcke aims to lift that to 45 percent within a decade.

Photographer: Charles Ellena/Bloomberg

Nestle CEO Paul Bulcke speaks during a meeting in Switzerland. Close

Nestle CEO Paul Bulcke speaks during a meeting in Switzerland.

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Photographer: Charles Ellena/Bloomberg

Nestle CEO Paul Bulcke speaks during a meeting in Switzerland.

Bottled Water?

Nestle’s sales in emerging markets rose 8.5 percent last year, double the rate of the company’s total revenue. Its sales from those regions totaled 35 billion francs, more than any rival.

Nestle shares, which no analyst recommends selling according to 42 ratings tracked by Bloomberg, are up 4 percent this year. They fell 0.3 percent to 52.20 francs in Zurich today. Unilever has dropped 0.9 percent this year. Kraft Foods Inc., the world’s second-largest foodmaker, has gained 2.3 percent.

Nestle may purchase bottled water businesses in markets such as China, Frits van Dijk, head of Nestle’s Asian business, said June 22. Acquisitions would also be considered to expand its business selling nutrition products for athletes, such as PowerBar, Nestle Nutrition CEO Richard Laube said.

Pet Food

Possible targets may include Synutra International Inc., the $950 million Chinese infant-formula company, according to Katherine Lu, an analyst at Oppenheimer & Co. Nestle should consider buying natural pet-food makers to better compete with Procter & Gamble Co., which agreed to buy Natura Pet Products Inc. on May 5, or enter new bottled water markets in India and Africa, said James Targett, an analyst at Consumer Equity Research. Nestle Waters CEOJohn Harris said June 18 the company has a list of five new markets it would like to enter.

“The cash lets Nestle have the stomach to invest behind their existing businesses and markets,” said Thomas Russo, a partner at Gardner Russo & Gardner in Lancaster, Pennsylvania, which holds more than $350 million of Nestle shares for clients. “They have the field pretty much to themselves at the moment.”

Nestle spokesman Ferhat Soygenis declined to comment.

Bulcke, 55, has made only one purchase of more than $1 billion since taking over as CEO in April 2008, the $3.7 billion purchase of Kraft’s North American frozen pizza business announced one day after the Alcon sale. The CEO has pledged to spend as much as 3 billion francs a year on acquisitions of smaller companies, and Nestle has said the company doesn’t need to make “transformational” purchases.

Possible Targets

The cash due from Novartis is enough to buy any of Nestle’s rivals in food and non-alcoholic beverages save the six biggest. That includes adding a 22 percent average premium that Nestle paid for its acquisitions of listed companies since 2000.

“They’re going to use the money to buy assets, at least a big chunk of it,” said David Hayes of Nomura. According to Hayes, Nestle may look at General Mills Inc., the maker of Betty Crocker cake mix, which has a market value of $24.8 billion.

The only listed food and non-alcoholic beverage companies with market capitalizations of more than $28.1 billion are Coca- Cola Co., PepsiCo Inc., Unilever, Kraft and Groupe Danone SA.

H.J. Heinz Co. or Hershey Co. could also be targets for Nestle, Euromonitor said in a May 20 report. Heinz would allow scope for lower costs in culinary aids and baby food, and Hershey would strengthen Nestle in its weakest region for chocolate, the market research company said. Heinz has a market value of about $14 billion and Hershey is valued at $11 billion.

‘Hidden Gems’

Nestle should avoid buying big companies that would make managers spend too much time selling assets to satisfy antitrust regulators, Thornburg’s Trevisani said.

“Ideally they find a few hidden gems like Nespresso out there that may not look great at first glance, but over time develop into really viable growth businesses,” Trevisani said.

Investors would also like to see share buybacks and dividends funded by the money it will receive for selling the stake, said Joerg de Vries-Hippen, who counted Nestle as the biggest holding in his Allianz RCM Swiss Fund at the end of 2009.

“The right thing is a mix,” said de Vries-Hippen, who helps manage 16 billion euros ($19.5 billion) at Allianz Global Investors in Frankfurt. “If you’d win the big jackpot, 30 million, and the first thing you do is buy a big house, 10 cars and maybe give your family a lot of money, in the end you will have lost all your money.”

Nestle needs to give investors more clarity on what it will do with the money, or else analysts might become less willing to recommend buying the stock, said Carl Short, an equity analyst at Standard & Poor’s Equity Research. He moved to “hold” from “strong buy” in October, partly on such concern.

“It becomes a bit of a problem, because if you’re telling someone to buy the stock, they can turn around and say ‘what am I really buying?’” Short said. “You could buy Nestle today and in six weeks time, it’s a completely different company.”

To contact the reporter on this story: Tom Mulier in Geneva at tmulier@bloomberg.net

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