Nestle Stirs Up Baby Formula Market with Pfizer Deal
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Nestlé’s (NASDAQOTH: NSRGY) announcement of its acquisition of Pfizer’s (NYSE: PFE) infant nutrition business for $11.9 billion Monday will solidify the Swiss-food giant’s position as the world’s largest provider of baby milk products.
News of Nestle’s nestled-deal sent shares up 1 percent.
The deal for Pfizer’s SMA, Promil and S-26 Gold baby-milk formulas, the biggest to-date for the Nestle Group, was beat out by Danone (NASDAQOTH: DANOY.PK) and Mead Johnson (NYSE: MJN). With Pfizer wanting to concentrate more of its business on its pharmaceutical operations, Nestle agreed to pay 19.8 times what analysts estimated for the unit’s expected pretax 2012 earnings; 85% of the nutrition unit’s revenue comes from emerging markets with about a quarter of its sales from China. This will bring Nestlé’s market share to first place in Asia and up from eighth place in China to second, information according to a New York Times report and other sources.
“Fueled by 16 million new births a year, annual growth rates for China’s baby formula market have been as high as 20 percent over the last five years. The market is forecast to double to $16 million by 2016,” as stated by Reuters, also, “Per capita consumption of baby food remains low in emerging markets….” However the WSJ affirms that, “the powered baby-milk market is forecast to be the fastest-growing consumer-stables category over the next five years, growing 10% annually, according to Euromonitor.”
As global health concerns such as malnutrition, infection and diseases continue to have its greatest affect on child healthcare, companies within the nutrition, health, and wellness industry have come up with in-house initiatives to combat public health risks.
On January 1, 2011 Nestle implemented the Nestlé Health Science initiative as a means to develop “science-based personalized nutrition solutions to chronic medical conditions,” along with the creation of Nestlé Institute of Health Sciences “to spearhead biomedical research into health and disease as influenced by genetics, metabolism and environment, with the goal of translating this knowledge into personalized science-based nutrition.” As a wholly owned subsidiary, the goal of Nestle Health Science is “to pioneer a new market between food and pharmaceuticals,” as all outlined in the 2011 annual ‘letter to shareholders’ report.
While the French-maker, Danone, may have missed out on the Pfizer deal, they could still gain some acquisitions from any disposals made from Nestle because of antitrust regulations. Not to be outnumbered in global sales, Danone reported strength in all its food categories including its dairy division, holding its position as the world’s largest yogurt maker; other financial results reveal that:
- organic growth was up 6.9% in the first quarter
- Danone reported sales up 7.6% in Q1 2012
- There was growth in all divisions and regions
- 2012 full-year targets confirmed
As for Danone’s efforts in public health, the company created Danone Institutes, non-for-profit organizations that provide education programs to the general public and nutrition research to health and education professionals.
Others like the Mead Johnson Pediatric Nutrition Institute aims at finding time and cost-cutting measures to research development in order to make the necessary technology and products available more efficiently to those who need it most.
The Mead Johnson Nutrition Company, maker of the Enfa family of brands, including Enfamil infant formula, is the world’s leading brand franchise in pediatric nutrition, as boasted on the company’s website. Yesterday’s release of its first quarter 2012 results reveals:
- Sales up 9% in Q1 2012
- Double-digit growth of 22% in Asia/Latin America segment, down 12% in North America/Europe
- 2012 guidance outlook 9%-11%
- Organic growth +8% in the first quarter
It shouldn’t go without mention that Abbot Laboratories (NYSE: ABT), maker of the Similac brand infant powder formula reported a wldwide sales increase of nearly 6% and raises its 2012 full-year outlook. Also the company recently announced plans to separate into two publicly traded companies, one in diversified medical products and the other in research-based pharmaceuticals.
Nestle has continued to broaden its presence in the $30 billion a year baby food industry by heavily investing in Russia, India and many African and Latin American countries, as well as in Western Europe and North America. The company has also partnered with two major Chinese manufacturers, one of each that separately produces the Chinese food staple of ready-to-drink peanut milk and sachima, a traditional Chinese snack, all the while maintaining its market lead in milk formula in Latin America, Africa and the Middle East. The 2011 financial results for Nestle reported:
- Organic growth +7.5%
- Nestle reports sales up +11.3%
- Growth in all divisions and regions
- Outlook confirmed at 5%-6% organic growth
According to Nestle’s annual report, the company was included in the Financial Times Stock Exchange Ethical Index (FTSE4Good), “the only responsible investment index that has criteria on the marketing of breast-milk substitutes in addition to human rights and supply chain management,” and the company was awarded the Stockholm Water Industry Award. Unfortunately, all this comes on the heels of accusations of unethical business practices that first began to take notice in the 1970s.
Nestle has been accused of using misleading advertisements in promoting the use of infant formulas in developing countries. Its most damaging accusation occurred during the 1970s when the ads led to harmful, even some fatal, actions in Africa because of the mothers’ misunderstanding of the practice and process of these baby food products. Unassuming mothers were substituting breastfeeding, and improperly mixing the formula (while having to use contaminated waters to do so), and not realizing that they were starving their babies to death. Today, there are on-going worldwide protests and demonstrations.
In perhaps another “shiner” for the company - amongst the thousands of products manufactured by Nestle - in May of 2011, Nestle unveiled an espresso-style baby milk capsule devise. Currently only sold in Switzerland, the BabyNes system involves “single-serve formula milk powder capsules, bottles and machines that prepare the drink "at precisely the right dosage and temperature, at the push of a button, in less than one minute,"” as described in the UK news syndicate, The Guardian.
Needless to say, the BabyNes system has “spark[ed] fury from campaigners who say the multinational's newest product will undermine the advice of the World Health Organisation (WHO) that babies under six months should be exclusively breastfed,” the article continued.
Despite economic and environmental challenges and constrained consumer spending in Europe and North America, Nestle will have another strong performance year. Investors will benefit from the dividend yield of 3.51%, stable stock price movement, and from the latest consensus of analysts forecasting that the company will outperform the market. With particular attention to the baby milk formula market, the Nestle Group is taking more than just baby steps for its drive for world dominance in the food industry.
dpricevan has no positions in the stocks mentioned above. The Motley Fool owns shares of Abbott Laboratories. Motley Fool newsletter services recommend Pfizer. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.