Glenboden M & A Originations

Nestle makes breakthrough into healthcare nutrition after Novartis deal

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Origination Status acquisition announced, subject to regulatory approval, in December 2006;
Asset business unit of Novartis Consumer Health Division providing oral and enteral nutrition;
Buyer Nestle Group (Switzerland), multinational food group;
Seller Novartis (Switzerland), multinational pharmaceutical group;
Buyer Rationale Nestle to become no. 2 in global healthcare nutrition, and to acquire greater R&D capability in this area;
Seller Rationale Novartis to enhance focus on medical healthcare and to strengthen financial position;
NBs cost synergies of 5% of turnover p.a. expected.
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This is a truly transformational deal for Nestle, causing its global market share in healthcare nutrition to increase from 7% to 25%. It also marks a big step towards a more ‘disease-specific approach’ in the group’s nutrition business, i.e. products for people who are ‘already ill’, as opposed to just wanting wellness. The deal also opens the door for further, bolt –on acquisitions in this and adjacent categories, especially in strategic geographies with large and ageing populations.

The pharma heritage and knowhow brought by this part of Novartis will have major implications for all of Nestle Nutrition’s business functions including: R&D (more clinical trial and health data competence and regulatory interface); sales and supply chain (more healthcare institutions and pharmacies and homecare); branding (greater differentiation and consumer intimacy).

Maybe the ‘real deal’ is about much more than this? Why does Novartis not define this as a divestment from non-pharma healthcare? Perhaps these high valuation numbers factor in something much more intimate between Nestle and Novartis?

Maybe one day they’ll merge to form ‘the great Swiss healthcare and nutrition champion’. A big clue as to whether this is the end-game plan behind the $2,5 bln headline deal value is only cash and net debt, or includes ‘other value instruments’, or offsets such a secondary deal between the two groups in the near future. Gerber perhaps ?

If the above conspiracy theory is incorrect, and the deal is genuinely stand-alone, then the valuation is indeed rather high, all things considered. With an operating margin of under 10%, it doesn’t look like a business with a captive, high-entry-barrier market, and is performing well below Nestle Nutrition’s target of 20% EBIT.

Synergy targets are vague and possibly didn’t drive the valuation. Most important, the growth rate appears to be only in single-digits.

On the other hand, the prospects of an ageing population and greater non-hospital care obviously provide an exciting growth story for the longer-term future.

This deal also supports Switzerland’s status as a leading centre for high-tech innovation in specialist foods, nutrition and ingredients (note contemporaneous acquisitions by Givaudan and Galenica).

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THIS LEAD'S VALUATION
Size (€ mln) 1.900
Sector medical nutrition
Asset Quality blobal no.2 b2b
Seller large plc
Buyer large plc
P/S 2,6
P/Ebitda 17,6
Type enterprise value
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