Nestle acquiring Gerber from Novartis for $5.5 billion

by Josh Sosland
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VEVEY, SWITZERLAND — In its most dramatic step yet toward building its Nutrition business, Nestle S.A. on April 12 said it reached an agreement to acquire the Gerber business of Novartis AG for $5.5 billion.

When completed, the acquisition would cap a buying binge nearly doubling the size of the Nestle Nutrition business to $8.5 billion in annual sales from $4.4 billion in 2006. At the higher level, Nutrition would account for 10% of total Nestle sales.

Peter Brabeck-Letmathe, Nestle chairman and chief executive officer, is pinning the company’s future on the growth of its health and wellness business. Gerber fits well into this future, he said.

"The acquisition of Gerber is the perfect complementary fit," Mr. Brabeck-Letmathe said. "It not only gives Nestle the leadership position in baby food, but it also constitutes a decisive step to establish Nestle Nutrition as the undisputed global leader in the nutrition field, with annual sales of around 10 billion Swiss francs ($8.5 billion) , covering all important sectors: infant formula, baby food, medical nutrition, weight management and performance nutrition. This is a major step in the transformational journey of Nestle toward a nutrition, health and wellness company."

Finding the "perfect complementary fit" came at a hefty price premium, as measured by other food industry acquisitions of recent years. At $5.5 billion, the purchase price is 2.8 times estimated 2007 sales of $1.95 billion and 15.7 times projected 2007 EBITDA of $350 million.

Nestle projected the acquisition would be neutral to its earnings per share in the first full year and accretive in the second year. The transaction is expected to close in the second half of 2007.

Established by Daniel Gerber in 1928, Gerber sells 190 food products in 80 countries labeled in 16 languages. Since 1967, the company has operated Gerber Life Insurance as a subsidiary and in 1999, the company introduced a line of skin care and health care products.

Nestle attempted to acquire Gerber in 1994, but was outbid by Sandoz Ltd., which two years later merged with Ciba-Geigy Ltd. to form Novartis.

Other recent acquisitions in the Nutrition segment of Nestle include the Jenny Craig and Novartis Medical Nutrition businesses.

Not only is Gerber the leading baby food business in the United States, the company is dominant with an 82% market share. According to Nestle, Gerber’s annual sales growth rate is 7% with opportunities for higher growth still.

Additional Gerber strengths identified by Nestle include the baby food company’s critical mass as a stand-alone organization, a strong research and development network to keep the new product pipeline filled, a track record of success in claim-based innovation and a strong partnership with the medical and scientific community.

Recent successes in new product development have included a move toward aseptic filling and the launches of Graduates and Organic product lines. Graduates were introduced in 1990 and have grown into a $250 million brand with a 21% compounded annual growth from 2004 to 2006. A sampling of other opportunities Nestle identified for innovation in the years ahead include:

• The introduction in baby food of science-based, proven nutrition concepts

• Expanding the age of consumption by further growing the toddler category

• Addressing obesity among babies and toddlers

These opportunities and existing strengths have prompted Nestle to project a 10% sales growth target with Gerber’s EBIT margin expanding to 20 % from its current level of 18%.

Nestle also highlighted the complementary nature of the acquisition, extending the company’s current global leadership in the infant nutrition business to the top spot in the global cereal, meals and drinks businesses for babies.

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