Nestleâs acquisition of Gerber confirms its exit from non- health & wellness in developed markets
- April 12, 2007
||agreement of business unit subject to regulatory approval, April 2007;
||brands and business of Gerber, no.1 US baby food brand;
||Nestle Group (Switzerland), multinational food group;
||Novartis (Switzerland), multinational pharmaceutical group;
||Nestle Nutrition to become no. 1 global baby food business;
||to complete divestment programme, Novartis now entirely focused on healthcare;
||Gerber controls 80% of the US baby food market, the worldâs largest.
When we reviewed Nestleâs acquisition of Novartisâ 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 Nestleâs transformation to a âhealth, wellness and nutritionâ company. At the same time it serves to re-confirm Nestleâs gradual, sometimes covert withdrawal from what itâs most associated with â 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 Novartisâ healthcare nutrition business. Itâs 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, itâs perfectly legitimate to use 2007F, but Nestleâs figures assume sales growth of 22% this year, while Gerberâs 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, Gerberâs market position support a full price. Add to that a compelling âstrategic fitâ, and Nestle may have been itching to buy this business at any price.
Itâs 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 âmeaningful, claim-based innovationâ potential that Gerber brings to Nestle, not only in baby food but also in infant care products and even âjuvenile life insuranceâ. And how great to have a dedicated, globally strong infant nutrition brand to relieve the heavily-stretched âNestleâ marque.
The financial side of the story accentuates the potential for it to tip Nestle into accelerating its divestment or âdisinvestmentâ programme from its more traditional and less healthy categories.
Gerberâs operating margin is close to Nestleâs 20% target and is higher than in the Groupâs traditional food portfolios. Gerber will also increase Nestle Nutritionâs total sales revenue by nearly 25%, to 10 bln CHF, which will grow that unitâs share of Nestle Groupâs sales to a level close to the milestone 10%.