Nes­tle passes on mega deals with nutrition unit

The Pak Banker - - Company & Boss News -

GENEVA: Nes­tle SA sat on $28.3 bil­lion in cash this year while com­peti­tors shelled out bil­lions for ac­qui­si­tions, in­vest­ing in­stead on build­ing a per­son­al­ized nutrition busi­ness and mak­ing smaller pur­chases.

Nes­tle aims to be­come the leader in health sci­ence nutrition in 10 years, ex­tend­ing its dom­i­nance be­yond cof­fee, pow­dered milk and baby food. The Swiss maker of KitKat choco­late bars says Nes­tle Health Sci­ence's prod­ucts will help treat or pre­vent con­di­tions such as high blood pres­sure and obe­sity.

The world's largest food com­pany, Nes­tle shunned the three biggest food deals of the year, even af­ter amass­ing a cash pile from the sale of its stake in Al­con Inc. Kraft Foods Inc. be­came the No. 1 con­fec­tioner with its $21 bil­lion pur­chase of Cad­bury Plc; Pep­siCo Inc. agreed to pay more than $3.8 bil­lion for Wimm-Bill-Dann Dairy & Juice Co. in Rus­sia; and KKR & Co. led a $4 bil­lion buy­out of Del Monte Foods Co.

"They choose not to play," said Thomas Russo, who man­ages $3.5 bil­lion at Gardner Russo & Gardner in Lan­caster, Penn­syl­va­nia. "We have long been re­warded by Nes­tle's will­ing­ness to step away from the moves made pop­u­lar by the crowd." Russo has 11 per­cent of the as­sets he over­sees in Nes­tle, a stock he has owned for more than two decades.

Vevey, Switzer­land-based Nes­tle won't say how much it's in­vest­ing in the health unit, which opens on Jan. 1 to de­velop gels, shakes and sol­u­ble pow­ders. Luis Cantarell, head of the busi­ness, said he'll spend five years de­vel­op­ing a prod­uct range and pipe­line to pre­vent or treat Alzheimer's, obe­sity, di­a­betes and high blood pres­sure.

"There is a race to the mid­dle be­tween pharma and food," Cantarell said in an in­ter­view on Oct. 22. "The op­por­tu­nity is big. The risk is big. The re­ward is big." Nes­tle's mar­ket cap­i­tal­iza­tion has swelled by more than 70 bil­lion francs ($73 bil­lion) since 2004, mak­ing it Europe's sec­ond-most valu­able com­pany. It has re­turned 60 bil­lion francs of cash to share­hold­ers. The to­tal re­turn on Nes­tle shares since the end of 2004 is 120 per­cent, com­pared to 9.4 per­cent for Kraft and 46 per­cent for Pep­siCo. In the past year, Nes­tle shares have risen 11 per­cent, about the same as Pep­siCo, while Kraft gained 18 per­cent.

"We would like to see Nes­tle stay­ing away from a large ac­qui­si­tion and rather fo­cus­ing on health and nu­tri­tional cat­e­gories," said James Mof­fett, who over­sees about $7 bil­lion at Scout In­vest­ment Ad­vi­sors in Kansas City, Mis­souri. The Swiss com­pany hasn't shunned all ac­qui­si­tions, buy­ing Kraft's North Amer­i­can pizza busi­ness for $3.7 bil­lion. The pur­chase was smaller than some an­a­lysts ex­pected, as David Hayes of No­mura said Nes­tle might bid for Gen­eral Mills Inc., which has a mar­ket value of about $23 bil­lion.

Nes­tle has made about 10 "bolt-on" ac­qui­si­tions this year, dis­clos­ing the price only on the Kraft unit and a 9.6 mil­lion-euro bot­tled wa­ter ac­qui­si­tion. Nes­tle got a dis­count on the pizza busi­ness be­cause Kraft needed to raise money for Cad­bury, Russo said. "Nes­tle could ob­vi­ously af­ford any of the com­pa­nies that have come up," said Jon Cox, an an­a­lyst at Ke­pler Cap­i­tal Mar­kets, adding that strate­gic and fi­nan­cial con­sid­er­a­tions may have kept it away from Cad­bury and Wimm-Bill-Dann.

Pep­siCo is pay­ing about 19 times earn­ings be­fore in­ter­est, taxes, de­pre­ci­a­tion and amor­ti­za­tion for the Rus­sian com­pany, ac­cord­ing to Bloomberg data, while Nes­tle got the Kraft unit for 12.5 times earn­ings. -Bloomberg

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