Data

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

When Dan Loeb called on Nestle SA to overhaul its portfolio in June, the activist left the food giant room to make some acquisitions.

Now, according to Reuters, the Swiss company is looking at a purchase of Merck KGaA's consumer health business, best known for producing Seven Seas vitamins. The operation could be worth about 4 billion euros ($4.8 billion).

Nestle CEO Ulf Schneider should tread carefully: he risks paying a premium for a big bottle of pills for which he may not be able to go on charging steep prices.

Health and Wellness
Nutrition and health science is Nestle's second-biggest revenue generator
Source: Bloomberg
Data refer to first half of 2017

It's not surprising why he might be interested. Nestle's rate of sales growth has been anemic. His firm's strategy is underpinned by a healthy dose of wellness. A purchase would boost Nestle's nutrition and health science business, which accounted for 17 percent of sales at the half year, just as competitors are gaining scale. GlaxoSmithKline Plc is likely to buy out its consumer healthcare joint venture with Novartis SA next year. Reckitt Benckiser Plc recently bought baby formula maker Mead Johnson for $18 billion, encroaching on Nestle's turf.

The Merck business has been growing well ahead of the global economy, with organic revenue expanding at roughly 6 percent between 2013 and 2016. Sales were 860 million euros last year, implying a valuation of 4 billion euros it fetched the same multiple as Mead Johnson.

Growing Pains
Nestle's annual rate of annual sales growth has sunk in recent years
Source: Bloomberg

Can that growth last? It can make sense for consumer groups like Unilever NV and Danone SA to buy millennial-friendly brands like Dollar Shave Club and Alpro when the high prices paid are mitigated by the chance to shunt new high-margin products through a global sales network.

Vitamins are, however, a different proposition. Pricing power through branding is harder to achieve given the competition from super-cheap own-label alternatives. Seven Seas is already sold in more than 60 countries and claims market leadership in the U.K. The brand dates back to 1935.

Moreover, moving into market for over-the-counter medicines would be a strategic departure for Nestle, as Morgan Stanley analysts point out.

The risk is that an established player like Reckitt sees value in the Merck asset and nudges the price up through an auction. Reckitt has high leverage, with net debt expected to hit four times Ebitda at the year-end. But with a market capitalization of 50 billion pounds, even a modest placing of 5 percent of its equity could raise nearly 3 billion euros to fund a deal.

Spot The Difference
Nestle has struggled to outperform its European peers over the last year
Source: Bloomberg

Schneider's background is in healthcare, having joined this year from Fresenius SE. Like his big consumer peers, he is struggling to achieve growth and will need to use M&A to buy it. But he must choose his growth supplements with care.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net