Nestlé buys Gerber for $5.5bn

Nestlé, the world’s biggest foods group, on Thursday took a further step to boost its higher margin nutritional activities by buying the Gerber baby food business from Novartis for $5.5bn (€4.1bn, £2.8bn).

The acquisition will accelerate Nestlé’s strategic push into higher margin businesses than mainstream food and beverages and provide a further fillip to Peter Brabeck, Nestlé’s chairman and chief executive, before he steps down from the latter role next year.

Mr Brabeck, who will focus on the chairmanship, has pursued a series of acquisitions to increase Nestlé’s exposure to nutritional products to gain a marketing edge over rivals and boost margins. In a first big deal with Novartis last December, he bought the Swiss pharmaceuticals group’s medical nutrition business for $2.5bn.

The Gerber sale marks the conclusion of Novartis’s gradual disposal of non pharmaceuticals activities – and provides extra cash for investment in research or acquisitions.

Daniel Vasella, Novartis chairman and chief executive, told the Financial Times the group had no big takeovers on the horizon, but would use the $8bn generated from the sale of medical nutrition and now Gerber to boost its businesses.

“Only if we do not find good opportunities to reinvest in the business will we go into share buybacks and the like”, he said.

Gerber is one of the best known brands in the US, where the business, which now has about 4,500 employees, was founded nearly 90 years ago. The group, which had sales of $1.6bn and operating profits of $307m in 2006, is expected to boost revenues to about $1.95bn this year. Apart from being the US market leader, the company is also strong in Mexico, Poland and central America.

Despite the very high multiple paid, following the very full price for the medical nutrition deal, the Gerber deal is likely to be welcomed as making strategic sense for both groups.

The disposal, which had been rumoured for months but appeared to have run aground over price, is a boost for Novartis after the recent setback owing to the withdrawal in the key US market of Zelnorm, a drug for irritable bowel syndrome.

“If someone is interested in this asset, which is an iconic brand, then the money has to be right”, said Dr Vasella.

Mr Brabeck said: “The acquisition of Gerber is the perfect complementary fit. It not only gives Nestlé the leadership position in baby food, but it also constitutes a decisive step to establish Nestlé Nutrition as the undisputed global leader in the nutrition field.”

The deal will boost sales in Nestlé’s new nutritional division to about SFr10bn ($8.2bn, €6.1bn) a year, or roughly 10 per cent of group turnover.

Mr Brabeck’s steady shuffling of the group’s portfolio into higher margin products played a significant role in the group’s announcing record sales and profits for 2006. Sales rose by more than 8 per cent to SFr98.5bn, while net profits jumped by nearly 14 per cent to SFr9.2bn.

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