Nestle SA, the Swiss food company that raised $28.1 billion from selling a stake in Alcon Inc. this week, may be the winner in the battle for Cadbury Plc without buying a single Dairy Milk chocolate bar.
Nestle yesterday agreed to buy Kraft Foods Inc’s US pizza unit for $3.7 billion, or 12.5 times estimated 2009 earnings. The Kit Kat maker paid 15.7 times earnings for Gerber baby food in 2007, its last major food acquisition.
While Kraft sold one of its fastest-growing units to lift the cash component of its hostile Cadbury bid, Nestle becomes the world’s biggest frozen pizza maker with cash to spare for other purchases. Chief Executive Officer Paul Bulcke yesterday said the company is “always open” for possible acquisitions after this week selling the 52 per cent Alcon stake and ruling out buying Cadbury.
“Kraft would be lumbered with debt post-Cadbury, but Nestle clearly have the firepower to pursue whatever they want,” said Andy Smith, the co-head of equity research at Icap Plc in London.
“Why would Nestle get involved in a consortium to bid against Kraft when they can go after deals that make more sense without the competition?”
Northfield, Illinois-based Kraft yesterday raised the cash component of its £10.9 billion ($17.5 billion) offer for Cadbury as investor Warren Buffett objected to a plan to issue millions of Kraft shares to finance the deal. Uxbridge, England-based Cadbury dismissed the change and said the offer remains “derisory.” Kraft has until Jan. 19 to raise it.
Kraft valued the pizza sale as being between 15 and 16 times earnings before interest, taxes, depreciation and amortization under US accounting rules, said Michael Mitchell, a Kraft spokesman. Nestle’s valuation is based on international accounting standards, said Robin Tickle, a company spokesman. Nestle will receive the proceeds from the Alcon sale in the middle of this year.
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After almost a decade of expanding via acquisitions under former Chief Executive Officer Peter Brabeck-Letmathe, Bulcke has cut costs since taking the helm in 2008 and has said he aims to make Nestle the world’s biggest nutrition company. He this week pledged to buy back an additional 10 billion francs ($9.7 billion) of shares.
Vevey, Switzerland-based Nestle may bid for baby-food maker Mead Johnson Nutrition Co or General Mills Inc., the maker of Cheerios cereal, this year, said Icap’s Smith and Nomura International Plc analyst David Hayes. Nestle and General Mills have a joint venture that sells breakfast cereal outside of North America. Either would be a better buy for Nestle, Smith said. Nestle’s Tickle declined to comment.
While buying Mead Johnson would result in antitrust issues in baby formula, “it’s not a deal stopper” as Nestle could sell assets with about $400 million of sales to placate regulators, said Hayes. Nestle can also still snap up some Cadbury assets, such as chewing gum, from any acquirer at a cheaper price, Smith added.
The company’s expansion into the US pizza market didn’t please all its investors.
“I’m not very happy,” said Catrina Vaterlaus, who helps manage 90 billion Swiss francs including Nestle shares at Bank Sarasin & Cie AG in Basel, Switzerland. “The growth has to come from emerging markets.”
The purchase was also a departure from Nestle’s stated strategic focus on expansion in health, wellness, and nutrition products, said Bernstein’s Andrew Wood.
“The company’s M&A strategy is supposedly focused on increasing the company’s exposure to this area,” Wood said in a note to clients. “Where’s the nutrition in frozen pizza?”
Nestle may also use its Alcon cash to start another share buyback program in mid-2011, said Marco Gulpers, an analyst at ING Wholesale Banking. “It’s showing to the market that the long-term view of where you are going is positive,” he said.