Nestle wins pricey battle for Pfizer baby food unit

The world’s biggest food company had to dig deeper than expected into its ample pockets to win the high-stakes fight for Pfizer Nutrition, which makes 85 percent of its sales in emerging markets.

“The price tag is high, however Nestle is securing a high growth/margin business with high exposure in the emerging markets. China will become the number 3 market for Nestle overall,” said Vontobel analyst Jean-Philippe Bertschy.

Nestle said the deal would add to earnings per share from the first year, and would allow cost synergies of $160 million. Bertschy estimated the deal would add about 0.5 percent to earnings per share in the first year and 1.5 percent in the following years.

Nestle shares, which hit an all-time high of 57.50 francs ahead of solid first-quarter results last week, fell 2.19 percent to 55.85 francs at 1104 GMT, compared with a 0.96 percent weaker European food and beverage index. The shares were trading ex-dividend, but were down less than the 1.95 francs payout.

“Although the growth profile, attractive margins and emerging market exposure makes this a compelling asset, we believe that the multiples being some way ahead of market expectations may dampen near term enthusiasm for the deal,” said Citi analyst Robert Dickinson.

The deal price was well above the $10 billion which had been expected. Nestle said it was paying 19.8 times expected 2012 core earnings, above previous Nestle deals in the sector when it paid 15.7 times for Gerber and 17.6 times for Novartis Nutrition, according to Citi.

Danone shares rose 2.1 percent to 53.54 euros as investors expressed relief that the French group would not have to leverage up its balance sheet to pay a big price for Pfizer.

CHINESE MARKET KEY

The Pfizer unit is a high-growth business built on its top SMA Gold brand, which ranks number five globally in the infant milk formula market – the world’s fastest-growing packaged food category – after Nestle, Mead Johnson, Danone and Abbott Laboratories, with a quarter of sale in China.

Nestle said the Pfizer business should boost its margins and it forecast its sales at $2.4 billion this year, bringing revenue from the combined business to above $7 billion.

Chief Executive Paul Bulcke said it was premature to comment on regulatory issues, but analysts have speculated Nestle might have to sell 25 percent of the Pfizer unit by disposing of interests in Latin America, southeast Asia, Australia and South Africa, which could be bought by Danone or Heinz.