Market Overview

Nestle Fight With Mead Johnson for Pfizer Infant Nutrition Business

It was revealed on Friday that Nestle will do battle with a team made up of Danone and Mead Johnson (NYSE: MJN) for Pfizer's (NYSE: PFE) infant nutrition business.

According to the Chicago Tribune, the PFE unit being sold is a high-growth $2.1 billion turnover business with over 70% of sales in emerging markets and a key position in China. It has now attracted the attention of the companies widely considered the three largest players in infant milk formula.

Most analysts and bankers are seeing Nestle as the clear favorites, due to its size. It is, after all, the world's largest food group. Still, the French-American combination of Danone and Mead Johnson could well provide unexpectedly stiff competition.

"A Danone-Mead combination looks a strong team, but we still see Nestle ahead, and it may be favored by Pfizer as a single party bidder," a person close to the situation is reported to have said.

March 5, Monday, will see the second round of bids after the process started back in July of last year when Pfizer decided to sell the division as well as the animal health unit following its $68 billion purchase of Wyeth two years earlier.

Pfizer's infant formula business ranks at number five in the world behind Nestle, Mead Johnson, Danone and Abbott Laboratories. Over a quarter of its sales are in China, and the current $6 billion mark is expected to double by 2016, so it does hold a significant amount of the world market share.

Both Nestle and Danone are currently facing antitrust problems, which is why the French company chose to join forces with Mead Johnson.

"Danone has solved the antitrust dilemma by getting together with Mead, and Nestle still has to deal with all that. The stakes are high for Danone; if Nestle wins the asset then Danone faces more robust competition from a much bigger competitor," said another unnamed source.

On February 27, Morgan Stanley released a research report focusing on the potential deal for Mead Johnson, saying that it views MJN's reported participation in bidding for Pfizer's nutrition unit as a net positive, as it could enhance both the company's strategic value and geographic scope. However, the process continues to carry some risk, as a successful bid by Nestle could likely pressure Mead's current multiple. “Pfizer is in the process of exploring strategic alternatives for its nutrition business, which holds the #5 position (~6% share) of the milk formula category globally and in China (~7.5% share), and also offers scale in developed (UK, ANZ) and emerging (Saudi Arabia, Philippines) markets. Recent press reports (Bloomberg, 2/17/12) indicate that preliminary bids of ~$10 billion were submitted, which we estimate would imply a ~18x NTM EBITDA multiple.”

The report also mentioned the involvement of Nestle, stating that, “As Nestle has previously been mentioned in the press as a potential acquirer of MJN, we believe – if Nestle were to acquire the Pfizer unit – Mead's valuation could see near-term downside. However, MJN would retain US Food's most dynamic growth profile, as well as its reputation longer-term as a valuable strategic asset.”

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