The global market for baby food is expected to grow by 10 percent annually through 2016, with growth concentrated in developing economies. For this reason, Nestlé agreed to buy Pfizer’s infant nutrition business for $11.9 billion in its largest ever acquisition, paying almost 20% more than Wall Street analysts had estimated. Nestlé offered Pfizer 19.8 times anticipated pre-tax earnings. This ultimate price surprised everyone, including Pfizer and its team. While Nestlé is paying an incredibly high price, analysts insist it wasn’t shocking given the potential growth and earnings. “It’s expensive, but it will be worth it. The market knows this is a strategic deal which makes sense in the long run,” said Jean-Philippe Bertschy, an analyst at Bank Vontobel in Zurich.
Pfizer’s nutrition business showed revenues of approximately $2.1 billion in 2011, up 15% from the 2010 numbers. Analysts report Nestlé was willing to pay this high premium in order to expand its share in the baby food market and to have better footing in both Asian and Middle Eastern emerging markets.
Mr. Bulcke said, “Back-office costs would be the main target for savings. Although Nestlé would be looking to use the combined sales forces of the two companies, the acquisition was mainly about growth, not generating synergies.” With this acquisition, Nestlé will increase its presence in China and Saudi Arabia, two of the few infant-nutrition markets where Nestlé doesn’t already have a strong presence.
Last year, mothers in China spent $6 billion on baby food and formula. That number is expected to increase dramatically in the coming years. Research shows that the mothers in China who do buy pre-made food for their children will not only likely buy the most expensive brand but that they also prefer to purchase foreign options.
The Pfizer unit generates a significant portion of its revenue from emerging economies. The acquisition will allow Nestlé to gain additional access to emerging markets all while allowing Pfizer the opportunity to turn their focus toward developing new prescription drugs. Amy Schulman, Executive Vice President, Pfizer General Counsel; President and General Manager, Pfizer Nutrition, stated, “The combination of Nestlé and Pfizer’s nutrition business, with its leading position in emerging markets, portfolio, and science, will continue to serve the needs of formula-fed infants and their healthcare professionals and caregivers.”
The transaction must meet customary closing conditions. This will include the receipt of regulatory approvals in some places. In order to gain this official approval, Nestlé may have to sell off some of its own businesses, potentially those in Mexico, as the size of the Pfizer nutritional business may throw antitrust flags. Pfizer expects the deal to be complete by the first half of 2013 once Nestlé receives all necessary regulatory clearances as well as the completion of other conditions. Pfizer employees will be transferred to Nestlé and they will begin working as soon as they have proper authorization and meet required guidelines.