Nestle to Acquire Pfizer Baby Food Unit for $11.9 Billion

Nestle SA, the world’s biggest food company, agreed to buy Pfizer Inc.’s infant-nutrition unit for $11.9 billion, edging out Danone in a contest for a business that gets most of its sales in fast-growing emerging markets.

The purchase, Nestle’s biggest since it bought pet-food maker Ralston Purina Co. in 2001, will lead to annual cost benefits of $160 million and will boost earnings per share in the first full year, Chief Executive Officer Paul Bulcke said today on a conference call. The unit will increase Nestle’s annual sales of infant formula to $7 billion from $5 billion.

Nestle’s offer beat a bid of about $11 billion from Danone, according to a person with knowledge of the matter. The acquisition will help the Vevey, Switzerland-based company, already the top seller of infant-nutrition products, regain traction in the Chinese baby-food market, where it has been losing market share since 2005. The Pfizer unit gets about 85 percent of sales from emerging markets such as Asia, Africa and the Middle East.

“From a long-term perspective, it makes strategic sense as it will really strengthen Nestle’s position in Asia,” said Jon Cox, an analyst at Kepler Capital Markets in Zurich.

Pfizer fell less than 1 percent to $22.38 at the close in New York. Nestle fell 2.8 percent in Zurich as the shares started trading without the right to a dividend. Adjusted for that, the stock rose 0.6 percent to 55.50 Swiss francs. Danone rose 1.3 percent to 53.13 euros.

Acquisition Multiple

Nestle will fund the purchase through a combination of debt and cash, according to Chief Financial Officer Wan Ling Martello. The Swiss company had 7.9 billion Swiss francs ($8.6 billion) in cash and short-term investments at the end of 2011.

Nestle said it’s paying 19.8 times 2012 earnings before interest, tax, depreciation and amortization of the Pfizer unit. The multiple falls to 15.6 times after estimated cost savings, according to the Nestle. The price “seems realistic for an asset that’s almost 100 percent in emerging markets,” said Marco Gulpers, an analyst at ING Bank NV in Amsterdam.

In 2007, Danone paid about 22 times Ebitda for baby-food company Royal Numico NV, Merrill Lynch analysts said at the time. The same year, Nestle paid Novartis AG 15.7 times Ebitda for its Gerber baby-food division, while last year the Swiss company paid 16.8 times for Chinese candy maker Hsu Fu Chi.

Nestle, which was advised by Deutsche Bank AG and Rothschild, may have been perceived by Pfizer as having fewer regulatory obstacles to overcome than Danone, Gulpers said. The acquisition is the second-biggest announced this year, according to data compiled by Bloomberg, behind Glencore International Inc.’s $45 billion bid for Xstrata Plc.

Two Major Exits

“From a regulatory perspective, Nestle does make more sense,” the analyst said, adding that Europe and China would have presented hurdles for Danone.

Bulcke declined to comment on possible regulatory complications. Agnes Berthet-d’Anthonay, a spokeswoman for Danone, declined to comment.

The sale will be Pfizer’s largest divestiture since the $16.6 billion sale of consumer-health brands including Sudafed cold medicine and Bengay pain cream to Johnson & Johnson in

2006. It is the first of two major exits that Chief Executive Officer Ian Read outlined to shrink the New York-based company and concentrate on producing new drugs.

Pfizer’s nutrition business includes infant formulas such as SMA and Promil. The unit, which also makes Enercal supplements for adults, sells products in more than 60 countries, according to its website, and accounted for 3.2 percent of the company’s 2011 revenue. Pfizer gained the formula division through its $68 billion purchase of Wyeth in 2009.

Animal-Health Spinoff

Pfizer had the fifth-largest global market share of the infant-formula business in 2010, trailing Nestle, Mead-Johnson Nutrition Co., Danone, and Abbott Laboratories, according to research company Euromonitor International. Its market positions are strongest in the Middle East and Africa, and in the Asia-Pacific region, where Pfizer’s unit is the third- and fourth-largest respectively, said Euromonitor analyst Lee Linthicum.

Global sales of baby-food products are likely to gain 6 percent a year from 2011 to 2016, helped by low private-label penetration and the importance of infant nutrition to consumers, according to Euromonitor.

The sale is the largest for a nutrition business of 77 deals in the last three years, according to data compiled by Bloomberg. The next largest was when Bristol-Myers Squibb Co. split off its majority stake in Mead Johnson in 2009, leaving the food company with a $8.94 billion market capitalization at the end of that year.

In addition to the infant-nutrition business, Read is also spinning off Pfizer’s animal-health unit, which had $4.18 billion in 2011 revenue. The drugmaker is planning an initial public offering for the unit and has hired JPMorgan Chase & Co., Bank of America Corp. and Morgan Stanley to handle that deal, a person with knowledge of the matter said.

Morgan Stanley and Centerview Partners advised Pfizer on the sale of the infant-nutrition unit.