By David Jones
LONDON (Reuters) - European food groups Nestle
U.S. rival Mead Johnson Nutrition Co
Both Nestle and Danone -- third in the market -- see Wyeth, which makes milk formula for infants and toddlers, as high growth, with nearly 80 percent of sales in emerging markets, while Western Europe and the United States markets are sluggish at best, the source said.
The European groups consider the smaller Wyeth, with 60 percent of its sales in Asia, as particularly attractive, but are looking carefully at any antitrust issues a deal might throw up.
"Nestle and Danone see Wyeth as a strategic deal in an area in which they both want to grow and are clearly seen as the early frontrunners in this auction," said the banker.
Both see Wyeth's business in Asia as key since the region accounts for 45 percent of the world milk formula market -- China alone accounts for a fifth of global sales -- and because more than half the world's births occur in the region.
Nestle and Danone have established infant milk businesses growing at nearly 10 percent a year and have identified nutrition as a key strategic growth area. So Wyeth, with its SMA milk formula brand, would press the fast-forward button in markets like Asia and Latin America.
"Nestle could easily afford the deal but will face a number of antitrust problems. For Danone, it would be more of a stretch financially, but the group should encounter fewer competition issues," said an investor with shares in both the European food groups.
Nestle, the world's biggest food company, with relatively low debt, is well positioned to finance a deal but could face antitrust issues in Mexico, South America and Asia, while Danone could have to deal with concerns about market dominance in Britain and Australia.
The world's biggest drugmaker Pfizer put the Wyeth business up for sale in July, and analysts would have expected interest from the globe's top four players -- Nestle, Mead Johnson, Danone and Abbott Laboratories Inc
Currently, Nestle has a 19.3 percent share of the global baby milk formula market followed by Mead Johnson on 16.4, Danone 13.5, Abbott 12.1 and Wyeth on 5.6.
WHAT'S IT WORTH
Credit Suisse analysts value Wyeth at $8-10 billion using past industry deal multiples and the valuation of Mead Johnson. They assume the $1.9 billion annual turnover business has similar 23 percent operating margins to Danone's baby nutritional unit and Mead Johnson.
A price of $10 billion would equate to the same 22 times earnings before interest, tax, depreciation and amortization (EBITDA) multiple that Danone paid in its 12.3 billion euros acquisition of Numico in 2007 and ahead of the 15.7 times Nestle paid for the baby food group Gerber in a $5.5 billion deal earlier that year.
Swiss-based Nestle, with baby and infant brands like Gerber and Nido, dropped a big hint over future deals at its half-year results this month, saying it saw "unprecedented opportunities" for acquisitions and internal investment. In the circumstances, it decided it had better uses for its cash that renewing its share buyback program. [ID:nL6E7JA11J]
Chief Financial Officer James Singh said the group was looking for deals around the world in strategic areas after spending 4.5 billion Swiss francs on recent deals like Chinese confectionery group Huse Fo Chi and Kraft's U.S. frozen pizza business.
"We have also stepped up our M&A activity, though we remain focused on bolt-ons," Singh said at the results.
Nestle's debt fell to 14.5 billion Swiss francs at end-June compared with 29.6 billion a year ago, largely as a result of the sale of its Alcon eyecare business in August 2010, so with low debt and an AAA credit rating it has plenty of scope.
For Danone, with its Milupa, Bledina and Cow & Gate brands, Wyeth looks right up its strategic street, having already told investors it is not interested in entering the U.S. market. That appears to rule out a bid for Mead Johnson, a group with $3.14 billion of annual sales and a market value of $14.1 billion, spun off from Bristol-Myers-Squibb in 2009.
A Wyeth deal for Danone, being a smaller group than Nestle and with net debt of 7.5 billion euros at June 2011, might be stretching, but analysts say it could find the financing, but may be careful on price after some said it overpaid for Numico.
"Wyeth is more strategic for Danone than for Nestle. We say this in part because Nestle could always buy Mead Johnson if it wants to; Nestle can fund it and pay a premium, and is also interested in the U.S. market. On the other hand Danone cannot fund the purchase of Mead Johnson and we understand it is not interested in Mead Johnson's U.S. business," said analyst Pablo Zuanic at brokers Liberum Capital.
Nestle and Danone declined to comment on Wyeth, while Pfizer, which has appointed Morgan Stanley and Centerview Partners to advise on the sell-off, has said it does not expect to make any announcements until next year.
(Reporting by David Jones; Editing by Chris Wickham and Will Waterman)