Pfizer-Nestle Deal In Formulaic Stage

Reporters around the world have been scrambling to catch up with a report late yesterday that Nestle was the leading candidate to acquire Pfizer’s infant formula business and that a deal for upwards of $9 billion could be announced as early as next week. Primarily, the inquirers have found that the deal is not done, however, and “last minute jockeying could alter the playing field,” as Anupreeta Das, Dana Cimilluca and Jonathan D. Rockoff initially reported in the Wall Street Journal. Danone and Mead Johnson are said to be the primary also-rans-in-the-making.

Pfizer said last summer it would divest the unit, as well as its animal-health business (which will probably be spun off in an IPO), to focus on developing its core pharmaceutical business.

"Nestle is in the lead position and is closing in on a deal which we expect soon," one source tells Reuters’ David Jones. Another observer, Bernstein analyst Andrew Wood, points out in a note to clients that it would make “huge strategic sense” for the Swiss conglomerate, which is the world’s largest food company. 

“It is in the right categories and the right markets and with a reasonable price we would expect a fairly positive response from investors,” Wood says. 

Most parties involved had little or nothing to say about the speculation. “The process of exploring strategic alternatives for Pfizer’s animal health and nutrition businesses is ongoing,” a Pfizer spokeswoman tells Financial Times. “No decisions have been made at this point.”

The Pfizer brand names in play don’t exactly trip off the tongue. Some of Pfizer Nutrition's "first year formulas" are S-26 and S-26 Gold, SMA, Nursoy Gold (soy-based product for infants with allergies or those recovering from diarrhea), S-26 LF Gold (lactose free), and S-26 AR Gold (anti-regurgitation). S-26 LBW (low birth weight) and SMA/S-26 HMF (human milk fortifier) are specialty products often used in hospital settings. Progress and Progress Gold are the brand names of some of Pfizer's "growing up milks" for toddlers 1 to 3 years old, while Promise Gold is for young children 3 to 7 years of age, according to company materials.

In this 2010 YouTube interview, Kurt Schmidt, Nestle Infant Nutrition Business Head, North America, talks about the importance of the Gerber brand, which it acquired from Novartis in 2007 for $5.5 billion. Schmidt, who had been president and CEO of Gerber, was named deputy executive vice president responsible for Nestlé Nutrition, last September.

Forbes’ Matthew Herper says the anticipated sale “is seen by many investors as a likely first step for the Brobdingnagian drug firm to spin off even more divisions, potentially eventually including its emerging business in medicines that have lost patent protection.” 

One commenter to the WSJ’s story questions whether the company will be robust enough to develop blockbuster drugs in the future while another writes “$9B could provide a special dividend of about $1.20 per share. Give it to the shareholders, as PFE is more like a public utility stock at this point anyway.”

But FT’s Alan Rappeport  points out that combined revenues for the units are only about $5.5 billion -- a small portion of its annual sales of nearly $70 billion. “The nutrition unit has annual sales of about $2.1 billion and has been growing by about 8% a year,” he writes.

One area of growth for the business is in China, reports indicate. Bloomberg reports that Pfizer generated about 29% of its infant-nutrition revenue there in 2010 and Euromonitor projects about a 17% a year expansion of the market through 2015. 

Nestle may face antitrust issues there, however, as the acquisition would give it about 10% of the market, and It would face scrutiny in about a dozen countries overall, according to the story by Jeffrey McCracken and Drew Armstrong. But a purchase by Danone would create a company with “at least a 17% share, people with knowledge of the figures said in February,” and Mead Johnson would have about 20% or more.

“To win approval from antitrust regulators, Nestlé would likely have to divest assets in certain markets where it has a dominant position, according to people familiar with the matter,” the WSJ reports. “The magnitude of any such sales is unclear.”

Forbes’ Herper also cites a recent note by Barclay’s Capital analyst C. Anthony Butler that holds that news of a successful sale of the Pfizer unit “could help create a positive mood for drug stocks during the second half of the year.” 

Placebo effect or no, when it comes to stock trading, any panacea will do.

Tags: beverages, food
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