Pfizer Said to Prepare for $10.5 Billion Formula Unit Sale

Pfizer Inc. (PFE) plans to send out information on its infant-nutrition unit to potential bidders in September, kicking off an auction that may fetch as much as $10.5 billion, said people with knowledge of the process.

Nestle SA, Danone SA (BN) and Abbott (ABT) Laboratories have spoken to financial advisers about the business, and are likely to bid, said the people, who declined to be identified because the talks are private. Mead Johnson Nutrition Co. (MJN) and Unilever, the second-biggest consumer-goods company, may also examine offers, they said.

A successful bidder would gain operations with sales approaching $2 billion annually and baby-formula brands including SMA Gold and Promil Gold. If Pfizer fails to fetch the price it’s seeking for the infant-nutrition unit, it could spin out the business into a separate company.

“The iron is definitely hot, and Pfizer would like to strike,” said Damien Conover, an analyst at Morningstar Inc. in Chicago, in a telephone interview. “There are some synergies that these folks could have that would outbid what the market would pay for the unit” as a standalone spinoff, he said.

Possible buyers are currently studying the industry to assess its size and growth potential, said one of the people. They are also working to determine how much rivals would want to pay, the person said. Potential bidders and financial advisers have been preparing for a sale after Pfizer said in February that it was reviewing its businesses.

Pfizer rose 6 cents, or less than 1 percent, to $19.36 at 4 p.m. in New York Stock Exchange composite trading. The stock has gained 29 percent in the past 12 months.

Emerging Markets

The formula unit has generated interest because it serves emerging markets like Asia, and because the products don’t vary much region to region, unlike most consumer goods, said the people. Because there are multiple competitors in those markets, it’s unlikely that antitrust legislation would get in the way of a deal, Conover said.

“Our decisions on strategic alternatives will continue to be driven by what creates the best after-tax value to our shareholders,” Joan Campion, a spokeswoman for Pfizer, said in a phone interview.

Spokesmen at Nestle, Danone, Abbott, Unilever and Mead Johnson declined to comment on potential bids.

Biggest Deal

The Pfizer sale would be the largest of a vitamin or nutrition company in more than a decade, according to data compiled by Bloomberg. The biggest deal in that sector was Carlyle Group’s $3.8 billion acquisition of vitamin maker NBTY Inc. last year, the data show.

Nestle (NESN) had 8.06 billion Swiss francs ($10 billion) in cash and near-cash items as of Dec. 31, according to company filings. Danone had 1.05 billion euros ($1.51 billion), while Abbott had $3.65 billion.

Pfizer acquired the infant-nutrition division in its $68 billion takeover of Wyeth less than two years ago. The unit may fetch 16 times to 20 times earnings before interest, tax, depreciation and amortization, estimated at $500 million to $525 million for 2010, people familiar with the situation said. That would indicate a value of $8 billion to $10.5 billion, and the price could be higher depending on this year’s performance.

The unit is forecast to have Ebitda of $550 million to $575 million on sales of about $2 billion for 2011, one person said.

By comparison, Mead Johnson trades at about 18.9 times last year’s Ebitda of $776.8 million. Claudia Lenz, an analyst at Bank Vontobel AG in Zurich, said Mead should have a higher valuation than the Pfizer unit because Mead has better operating margins and is more focused on the U.S., a key infant-formula market.

Shedding Assets

Pfizer’s nutrition business, which also makes vitamins for pregnant women, accounted for about 3 percent of its $67.8 billion in total sales last year. Pfizer this month disclosed plans to shed that operation, as well as the animal health division, following a review of its businesses not tied to drug discovery. The New York-based drugmaker is facing the loss of exclusivity for its biggest product, the cholesterol pill Lipitor.

JPMorgan Chase & Co. is advising on the animal health business, while Morgan Stanley and Centerview Partners are working on the nutrition unit, according to a statement from Pfizer on July 7. JPMorgan also is seeking a role in advising a potential suitor for the nutrition business, the people said. Financial advisers are trying to get mandates to work with the four likeliest bidders, especially Nestle and Danone, said the people. Tasha Pelio, a spokeswoman for JPMorgan, declined to comment.

Two Teams

There will be two teams of advisers from Morgan Stanley and Centerview running the infant-nutrition process, one focused on the sale of the unit and the other on a potential spin of it into a separate company, said one of the people.

Morgan Stanley and Centerview advisers have spent months putting together stand-alone financial data on the infant-nutrition business while also assessing what companies could bid and what antitrust issues companies such as Vevey, Switzerland-based Nestle could have, said one of the people.

Pfizer said earlier this month that it doesn’t anticipate making announcements about options for the assets until sometime next year, and that any deal could take as long as two years to complete.

To contact the reporters on this story: {Jeffrey McCracken} in New York at jmccracken3@bloomberg.net; {Jacqueline Simmons} in Paris at jackiem@bloomberg.net

To contact the editor responsible for this story: Jennifer Sondag at jsondag@bloomberg.net

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