Nestlé’s baby food buy is surprisingly grown up. Following an M&A tug-of-war with smaller rival Danone, the world’s biggest food company will pay a punchy $11.85-billion (U.S.) in cash for Pfizer’s infant-nutrition business. But opportunities to buy big, high-growth emerging markets businesses are rare, and Nestlé should be able to generate a respectable return.
The Swiss group is paying about 4.9 times the unit’s estimated 2012 revenues of $2.4-billion. That looks high: Danone was roundly condemned in 2007 when it paid 4.5 times sales for Numico, a Dutch baby food outfit. However, with better margins and more cost savings, Nestle’s deal looks less of a stretch.
The company is paying 19.8 times current-year EBITDA; it reckons recent emerging-markets food deals have averaged about 21.6 times. Add in cost savings of $160-million a year – equivalent to about 7 per cent of this year’s sales – and the multiple drops to 15.6 times.
Assume that revenue growth remains a healthy 13 per cent a year, and operating profit margins stable at 22 per cent. With $300-million of integration costs and using Nestlé’s 27 per cent tax rate, the deal would generate a 6.8 per cent return in five years, Breakingviews estimates suggest. Antitrust-mandated disposals could complicate the picture somewhat. But Nestlé needs only a small improvement in sales growth or profit margins to beat its undemanding 7 per cent cost of capital – the result of its ultra-low borrowing costs.
In a fairly stagnant market, the deal ranks as one of the biggest of 2012. It is just the kind of transaction deal makers say should happen more often: cash-rich corporate titans buying growth in areas that make strategic sense. Pfizer gets a good price for a business it inherited from Wyeth, a rival drug maker. And Nestlé scales up in China, where its infant-nutrition business is a laggard. It’s hardly a big corporate gamble for the company, which logged sales of 83.6 billion Swiss francs ($90.8-billion) last year. Despite the risk of M&A temper tantrums, Nestle’s approach seems reassuringly mature.