Heinz Wants a Piece of Pfizer

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Last year pharmaceutical giant Pfizer (NYSE: PFE) unveiled plans to unload both its animal health and infant nutrition divisions. The company may partially float the animal health business, the largest such business in the world with revenues of $2.14 billion last year, in a $3 billion IPO. 

The $10 billion auction for the fast-growing infant nutrition business is already under way with several large global companies in the bidding, including U.S. food company, H.J. Heinz (NYSE: HNZ). The company is best known for its ketchup but it is the world's sixth largest infant nutrition business (by sales) and recently made a big push into the baby food market in China. Last year in China, it began selling baby food packed in pouches. 

The Pfizer nutrition business, acquired in the $68 billion Wyeth purchase in 2009, looks to be a good fit for Heinz since it is highly focused on emerging markets. Its CEO, William Johnson, said recently he is considering acquisitions in the emerging world. The company has a stated goal of having 25% of its revenues come from developing markets in five years and 40% of revenues from these markets in the longer term. 

Roughly two-thirds of the company's revenue already comes from overseas, offsetting dull results from the United States. This puts Heinz well ahead of its peers, which come in on average at half that amount. Even more importantly, its Asia-Pacific division is quickly catching up in size to its European food division. 

The problem is that this acquisition would not come cheaply and there is a question whether Heinz has the willingness to outbid other likely suitors such as Nestle ADR (NASDAQOTH:NSRGY.PK) and Danone ADR (NASDAQOTH:DANOY.PK), which may bid jointly with Mead Johnson Nutrition (NYSE: MJN). However, Heinz is likely to be in perfect position to pick up any pieces from Pfizer's baby food division that Nestle or Danone is forced to discard. 

If either Nestle or Danone wins the auction, regulators no doubt will force the winner to sell off some parts of the business due to antitrust concerns. Nestle is the maker of Gerber baby food and Danone owns the Blenda brand formula. Danone's revenue from the business last year rose 11% to $4.8 billion while Nestle's revenue in the sector climbed 7.3% to $7.9 billion. 

Both Nestle and Danone would face scrutiny from regulators in more than a dozen countries including China. The Chinese baby food market – the largest in the world and a focus for Heinz – is forecast to grow by about 17% a year through 2015 by research firm Euromonitor. Pfizer generated about 29% of its 2010 infant nutrition revenue from China. 

All of the overseas companies have enjoyed a windfall and increased market share in China in recent months as tainted milk from domestic producers has pushed Chinese mothers to purchase safer, higher-quality infant food from foreign producers. 

This means the bidding for Pfizer's unit may be fierce with the winner unknown at this point. But it is highly likely that Heinz will be picking up some tasty emerging market 'leftovers' once the regulators have had their say.

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