Nestle Sees Profits in Babies
Tony is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Global foods company Nestle ADR (NASDAQOTH: NSRGY) announced earlier this week that it would pay Pfizer (NYSE: PFE) $11.85 billion cash for Pfizer's nutrition division which is the maker of several of the world's top baby food brands. The acquisition price was above the rumored $10 billion price tag for the unit due to stiff competition between Nestle and France's Groupe Danone SA ADR (NASDAQOTH: DANOY.PK) for the unit.
Many investors may say so what...who cares about baby food? But investors should care since baby food is a highly profitable business. The global market for infant nutrition is worth an estimated $44 billion and is expected to grow to over $57 billion by 2015, according to the research firm Euromonitor. Nestle's own $7.9 billion infant formula and baby food business last year boasted an operating margin of 20 percent, above the 15 percent for Nestle as a whole.
It is one of the few businesses which has not stagnated in developed markets. Overall annual growth in the industry has been in the 9-10 percent range the past several years. However, the strongest growth has occurred in the emerging markets, particularly in Asia. There were as many babies born in China, India and Indonesia in 2010 as there was in the rest of the world combined.
This is the key to the deal since 85% of the $2.4 billion in sales last year for Pfizer Nutrition came from the emerging world. In China, for instance, top line growth in baby food has been in excess of 20 percent, crossing the $6 billion mark. Additionally, the Chinese market is expected to double in size by 2016. Nestle, which had little exposure to the Chinese market, now has one of the top players in that market with Pfizer Nutrition which earns about a third of its revenue from the Asian giant.
The deal should lift Nestle's share of the global market for infant nutrition from 24 percent to somewhere in the 26-29 percent range. Nestle was already a major player in the industry thanks to its $5.5 billion purchase of Gerber in 2007. Gerber is a market leader in the US market and has large market shares in Central America, Mexico and Poland.
The specific percentage Nestle will control of the bay food market depends on one important outcome. That outcome is how much of the Pfizer unit Nestle will have to dispose of in order to satisfy global antitrust regulators. This is where it can get interesting for investors. What juicy morsels will Nestle be forced to sell to other companies, including Danone, in order to satisfy regulators?
As detailed in a prior article, one of the companies poised to benefit will be H. J. Heinz (NYSE: HNZ). Rather surprisingly, Heinz owns the world's sixth largest infant nutrition business and has repeatedly stated that it wants to increase its exposure to emerging markets. Another company which may reap the benefits of any forced sales by Nestle will be Mead Johnson Nutrition (NYSE: MJN). It is believed that this company partnered with Danone in the failed for the Pfizer Nutrition unit. It is doing well on its own though, with sales and earnings growing by 14 and 15 percent respectively.
Despite reservations about the deal from some Wall Street analysts, the company that will benefit the most from this deal will be Nestle itself, which will now boast more than 40 percent of its total sales from developing markets. These analysys are likely the same ones who doubted Nestle's $10.3 billion purchase of Purina, the pet food maker, years ago which has turned out to be highly profitable for the company.
The Pfizer Nutrition acquisition is a rare opportunity to snap up a large and highly profitable business that gets almost 100 percent of its revenue from fast-growing emerging economies. Based on the company's long and successful track record on its acquisitions, look for Nestle to benefit from this purchase in the years ahead.
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