LONDON: SWISS food group Nestle is in pole position to buy Pfizer's US$10 billion (RM30.3 billion) Wyeth infant nutrition business in a two-horse race with French rival Danone and so boost its fast-growing Chinese business.
The two European groups have emerged as clear frontrunners in the auction after first-round bids were submitted before Christmas, while US groups Mead Johnson and Heinz are also involved in the second round.
"Assets as good as this do not come along very often. Nestle has deeper pockets than Danone and we would not expect them to give up on this deal. It is Nestle's deal to lose," said one banker working on the auction.
The Pfizer unit is an attractive US$2.1 billion (RM6.36 billion) turnover business growing at 8 per cent a year and based around its top SMA Gold brand. Some 60 per cent of Wyeth sales are in Asia, 30 per cent in Europe, largely Britain, and 10 per cent in Latin America.
It ranks number five globally in the infant milk formula market - the world's fastest growing packaged food category - after Nestle, Mead Johnson, Danone and Abbott Laboratories .
"The key strategic attraction in our view is Pfizer's position within the US$6 billion (RM18.1 billion) Chinese infant formula market. The market is unusual in having super-charged Chinese growth rates as well as highly attractive margins," said analyst Robert Dickinson at brokers Citi.
China's infant formula market is set to double in size to US$16 billion by 2016, having grown at more than 20 per cent over the last five years to feed 16 million new births a year.
Pfizer's business has a quarter of its sales in China.
Nestle, the world's biggest food group and infant formula maker, has a relatively small presence in this Chinese market but could leap to No. 3 nationally with the Pfizer unit buy. Market leader in China, Mead Johnson, saw its national sales jump 40 per cent in 2011, led by its top Enfamil brand.
International brands gained from a 2008 milk tainting scandal that damaged the reputation of domestic companies.
A deal for the Pfizer unit is well within Nestle's scope, with its low debts and AAA credit rating, and it could easily outbid Danone in a bidding war.
The Swiss group has said it is looking for deals after cancelling a share buyback programme. The purchase will stretch the smaller Paris-based Danone financially and may force it to sell off assets to mount a bid.
Credit Suisse analyst Robert Moskow values the unit at US$10 billion or 17.8 times its historic EBITDA profit. This compares to similar infant nutrition deals in 2007 when Nestle bought Gerber at 15.7 times and Danone purchased Numico for 22 times. A deal is some way off in the auction process and completion is expected to be delayed until the summer for tax reasons. Both European companies will face anti-trust hurdles.
Nestle, whose main formula brand is NAN, is likely to have to sell 25 per cent of Pfizer's unit sales by disposing of interests in Latin America, Australia and South Africa.
Danone, which sells Dumex as well as Milupa and Bledina brands, might have to sell 30 per cent of Pfizer's sales including Britain and Ireland.
Analysts say the situation in China is less clear. Danone's 14 per cent share in second place plus Pfizer's eight per cent share in fifth would overtake leader Mead Johnson's 16 per cent. Nestle has a relatively small four per cent share of that market. --Reuters