Nestle makes breakthrough into healthcare nutrition after Novartis deal
- December 02, 2006
||acquisition announced, subject to regulatory approval, in December 2006;
||business unit of Novartis Consumer Health Division providing oral and enteral nutrition;
||Nestle Group (Switzerland), multinational food group;
||Novartis (Switzerland), multinational pharmaceutical group;
||Nestle to become no. 2 in global healthcare nutrition, and to acquire greater R&D capability in this area;
||Novartis to enhance focus on medical healthcare and to strengthen financial position;
||cost synergies of 5% of turnover p.a. expected.
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 âdisease-specific approachâ in the groupâs nutrition business, i.e. products for people who are âalready illâ, as opposed to just wanting wellness. The deal also opens the door for further, bolt âon 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 Nutritionâs 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 âreal dealâ 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 theyâll merge to form âthe great Swiss healthcare and nutrition championâ. 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 âother value instrumentsâ, 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 doesnât look like a business with a captive, high-entry-barrier market, and is performing well below Nestle Nutritionâs target of 20% EBIT.
Synergy targets are vague and possibly didnât 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 Switzerlandâs status as a leading centre for high-tech innovation in specialist foods, nutrition and ingredients (note contemporaneous acquisitions by Givaudan and Galenica).