Nestle May Aim to Rebuild in Chinese Baby Food With Pfizer Unit

Nestle May Aim to Rebuild in Chinese Baby Food
China’s baby-food market grew about 21 percent last year to more than 42.1 billion yuan ($6.5 billion) and will probably expand about 17 percent a year from 2010 to 2015. Photographer: AFP/Getty Images

Nestle SA, the Swiss company said to be preparing a bid for Pfizer Inc.’s baby-food unit, may aim to regain momentum in China’s infant formula market by acquiring the maker of SMA Gold.

Buying the business would propel Vevey, Switzerland-based Nestle to No. 3 from No. 6 in China’s infant-nutrition market, Sara Welford, an analyst at Citigroup Inc. in London, said by phone. It would also offer potential cost savings equal to 10 percent of the unit’s sales, she estimates.

Nestle is the global leader in infant nutrition, the fastest-growing segment of the packaged-food industry. It’s lost market share in China since 2005, when it withdrew two varieties of Neslac milk powder because authorities found they contained too much iodine. Pfizer, the fourth-biggest baby-food company in the country, said July 7 it may sell or spin off its nutrition unit, sparking interest from Nestle, Danone SA and Abbott Laboratories, according to people with knowledge of the process.

“China is the single most attractive baby-food market and the company has been losing share there,” said Ildiko Szalai, an analyst at Euromonitor International in London, who estimates that Nestle’s share of the market shrank by a third to less than 6 percent from 2005 through 2009. “It’s a priority for them.”

Global sales of baby-food products are likely to gain 6 percent a year from 2010 to 2015, according to Euromonitor, which says that growth is being helped by low private-label penetration and the importance of infant nutrition to consumers.

Market Growth

China’s baby-food market grew about 21 percent last year to more than 42.1 billion yuan ($6.5 billion) and will probably expand about 17 percent a year from 2010 to 2015, the researcher estimates. Mead Johnson Nutrition Co. had an industry-leading share of about 13 percent in 2009, it says.

Pfizer’s baby-food business, gained through its 2009 purchase of Wyeth, had $1.9 billion in sales last year and according to people familiar with the matter may fetch $10.5 billion in a sale. The unit makes the SMA Gold line of products for infants and children and Enercal supplements for adults.

Nestle stepped up expansion in China with the $1.7 billion purchase in July of a 60 percent stake of Hsu Fu Chi International Ltd., the country’s biggest confectioner by market value. The maker of Gerber baby food aims to boost the portion of sales it gets from emerging markets to 45 percent by 2020 from about 40 percent. Unilever, the maker of Magnum ice cream, gets about 54 percent from developing regions.

Nestle Acquisitions

Nestle has made 19 acquisitions since the end of 2009, according to Bloomberg data. The company has said it plans to use its cash of more than 16 billion Swiss francs ($21 billion) to invest in existing businesses and make “bolt-on” acquisitions. Spokeswoman Melanie Kohli declined to comment on whether Nestle would be interested in acquiring the Pfizer unit.

A purchase of the business may boost profit by about 2 percent within three years, according to Citigroup’s Welford. So-called organic sales at Nestle’s nutrition unit probably rose 8.8 percent in the first half of 2011, according to Jean-Philippe Bertschy, an analyst at Bank Vontobel in Zurich.

Nestle, the world’s biggest foodmaker, is scheduled to report first-half earnings tomorrow. Net income probably fell to 4.61 billion Swiss francs, according to the average estimate of 11 analysts compiled by Bloomberg, hurt by higher raw-material costs and marketing spending. So-called organic sales, which exclude acquisitions, disposals and currency shifts, rose 6.5 percent, the estimates show.

Nestle last year got 10.4 billion francs, or about 10 percent of revenue, from nutrition brands such as Cerelac and Nestle Nan. The unit makes products ranging from formula milk for babies to cereals and snacks for toddlers.

Regulatory Hurdles

Paris-based rival Danone, which produces Bebelac formula milk, generated about 3.36 billion euros ($4.8 billion), or 20 percent of sales, from baby nutrition products in 2010. Revenue from the business increased about 10 percent in the first half.

While Nestle and Danone would both be capable of increasing earnings within three years of buying Wyeth, both would probably be required to sell parts of the business, Welford said. Nestle would likely face regulatory hurdles in Latin America, while Danone may encounter similar constraints in the U.K., Ireland, Australia and New Zealand, she said.

Nestle may decide that the antitrust issues are too great, according to Jeff Stent, an analyst at Exane BNP Paribas in London, who said it’s “questionable” whether the Swiss company will make an offer for the unit. Nestle would probably have to sell parts of the Pfizer business accounting for as much as 45 percent of the unit’s sales, he said.

Attractive Option

Wyeth may be the “most attractive” option for Danone, given a scarcity of large acquisition targets in emerging markets, Stent said. While the French company would be “somewhat stretched” to finance a deal, it would be able to acquire the Pfizer business by increasing its debt, he said. Danone had net debt of 7.3 billion euros at the end of 2010.

While Mead Johnson may have a strategic interest in acquiring the Pfizer unit, financially it may find such a purchase difficult, according to Jean-Philippe Bertschy, an analyst at Bank Vontobel in Zurich. The Glenview, Illinois-based company had net debt of $938.1 million at the end of last year.

Pfizer, the world’s biggest drugmaker, has said it doesn’t expect to make any further announcements about the alternatives for the two businesses until 2012. The U.S. company, which is being advised by Morgan Stanley and Centerview Partners, also said any transaction may take up to two years to complete.

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