April 24 (Bloomberg) -- Danone, beaten by Nestle SA in an $11.9 billion contest to acquire Pfizer Inc.’s nutrition unit, may have to scale back its expansion ambitions in the baby-food market after losing out on one of the industry’s main prizes.
The maker of Activia and Actimel yogurts could try to buy parts of the Pfizer business that Nestle has to divest because of antitrust obstacles, though has few other alternatives, according to Jeff Stent, an analyst at Exane BNP Paribas in London. Mead Johnson Nutrition Co., the baby-formula maker that Bristol-Myers Squibb Co. took public in February 2009, is a possibility, though with a market value of about $17 billion may be too large to swallow, even if it’s available, he said.
“There’s smaller baby-food businesses around, but this was pretty unique,” Stent said of Pfizer’s Wyeth unit. “Pfizer was almost bigger than ideal but it was still doable and a fantastic strategic fit. There isn’t a Pfizer part two.”
Danone lost out to Nestle by less than $250 million, or 2 percent of the final $11.9 billion bid, said a person familiar with the matter, putting in a bid higher than $11.6 billion. That price difference along with concerns Pfizer had about Danone’s ability to get antitrust approval for the deal in China, gave the asset to Nestle, said two people familiar with the matter.
Pfizer also determined Nestle was a safer home for its employees, added another person familiar with the matter. Danone bid alone, said these people, as an agreement that would have pre-sold some assets to Mead Johnson fell through weeks earlier.
Danone gets more than half its revenue from fresh dairy products, while infant nutrition accounts for only a fifth of its sales. Global sales of baby-food products are likely to gain 6 percent a year to 2016 from $30.9 billion in 2011, according to Euromonitor International, which says that growth is being helped by low private-label penetration and the importance of infant nutrition to consumers.
Nestle could have to sell 10-15 percent of the assets it just acquired from Pfizer, said people familiar with the matter, as antitrust concerns in countries in like Mexico and Australia could force divestitures.
The Vevey, Switzerland-based company may be instructed by regulators to sell some assets in markets where it already has a strong presence, according to Ildiko Szalai, a senior company analyst at Euromonitor International in London. A combined Nestle and Pfizer baby-food business would have a market share in Latin America exceeding 70 percent, she said.
“Danone would really like to enhance its American positions and if Nestle auctions some assets, Danone could pick up some in Latin America,” Szalai said.
The Paris-based owner of the Evian bottled-water brand, which generates about half its sales in emerging markets, declined to say whether it would be interested in acquiring any divested assets. It has said it plans to expand in markets such as China, India, Indonesia and Mexico as well as the U.S.
Danone shares rose 1.3 percent to 53.13 euros in Paris trading yesterday. Nestle advanced 0.6 percent after adjustment for the shares trading without the right to a dividend.
Danone may also seek to expand in the dairy market through acquisitions similar to its purchase in 2010 of a majority stake in Russia’s OAO Unimilk, said Stent at Exane BNP Paribas. That purchase made the company Russia’s biggest dairy producer.
“You might see another deal like Unimilk because there’s a lot of the world where they don’t have a meaningful presence in dairy, so they could definitely do something here,” he said.
Another possible avenue for expansion is bottled water, according to Stent. Revenue from the product group increased 16 percent last year and made up 17 percent of revenue in 2011.
“Danone’s not a global player in water, so I can’t see how they’d do a big waters deal, but they’ve been building up in markets like Brazil and they could seek to do some small bolt-ons,” Stent said.
Danone may also be looking to expand its existing collaboration and investment in Japanese beverage maker Yakult Honsha Co. The company is in talks to increase its holding to 28 percent from 20 percent, the Nikkei newspaper reported April 21, without saying where it go the information. A Danone spokeswoman declined to comment on the report.
Yakult’s probiotic and fermented milk drinks are similar to offerings from Danone. The two companies talk about increasing their collaboration “as part of daily communication,” Yakult said, without providing additional information. Danone would make a tender offer to raise its stake to 35 percent should the talks fail, the Nikkei reported.
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