Glenboden M & A Originations

Nestle’s acquisition of Gerber confirms its exit from non- health & wellness in developed markets

Priority Rating priority rating 4
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Origination Status agreement of business unit subject to regulatory approval, April 2007;
Asset brands and business of Gerber, no.1 US baby food brand;
Buyer Nestle Group (Switzerland), multinational food group;
Seller Novartis (Switzerland), multinational pharmaceutical group;
Buyer Rationale Nestle Nutrition to become no. 1 global baby food business;
Seller Rationale to complete divestment programme, Novartis now entirely focused on healthcare;
NBs Gerber controls 80% of the US baby food market, the world’s largest.
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When we reviewed Nestle’s acquisition of Novartis’ healthcare nutrition business, we suggested that there might be a secondary deal in the works, between the two groups. This deal is another big milestone in Nestle’s transformation to a ‘health, wellness and nutrition’ company. At the same time it serves to re-confirm Nestle’s gradual, sometimes covert withdrawal from what it’s most associated with – confectionery, dairy etc.

In fact, only a few days after this announcement, more dairy divestments were announced by Nestle, this time in south-east Asia.

The valuation, predictably, is very high, even higher than that of Novartis’ healthcare nutrition business. It’s notable that Nestle presents the valuation at a P/S of only 2,8 (2007F). We prefer to take the 2006 sales figure provided by Novartis, the seller, which gives us a P/S of 3,4.

Of course, it’s perfectly legitimate to use 2007F, but Nestle’s figures assume sales growth of 22% this year, while Gerber’s underlying organic growth rate is only 7% also according to Nestle.

At the same time, Nestle cites a P /EBITDA number of 15,7 (2007F), while quoting an EBITDA margin of 18% which, again applied to 2006 sales, raises the P /EBITDA to 19,1. Our alternative numbers would mean the valuation is at a premium to comparative transactions, not in line with them.

On the other hand, Gerber’s market position support a full price. Add to that a compelling ‘strategic fit’, and Nestle may have been itching to buy this business at any price.

It’s notable that cost synergies, estimated at a standard 5% of sales, will not appear it seems until 2010; this is a marketing-led deal more than a finance-led one.

Just think of all the ‘meaningful, claim-based innovation’ potential that Gerber brings to Nestle, not only in baby food but also in infant care products and even ‘juvenile life insurance’. And how great to have a dedicated, globally strong infant nutrition brand to relieve the heavily-stretched ‘Nestle’ marque.

The financial side of the story accentuates the potential for it to tip Nestle into accelerating its divestment or ‘disinvestment’ programme from its more traditional and less healthy categories.

Gerber’s operating margin is close to Nestle’s 20% target and is higher than in the Group’s traditional food portfolios. Gerber will also increase Nestle Nutrition’s total sales revenue by nearly 25%, to 10 bln CHF, which will grow that unit’s share of Nestle Group’s sales to a level close to the milestone 10%.

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THIS LEAD'S VALUATION
Size (€ mln) 4.230
Sector infant nutrition
Asset Quality US no.1 branded
Seller large plc
Buyer large plc
P/S 3,4
P/Ebitda 19,1
Type total consideration
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