Multiple reports have surfaced indicating that Nestlé SA may be on the verge of winning the auction for the nutrition business being hived off by the world's largest drugmaker in a deal worth between $9 billion and $10 billion. The sale, which reportedly could be announced as soon as next week and potentially by the end of April, would be one of two massive divestitures Pfizer carries out in 2012. In the other transaction, the drugmaker reiterated Wednesday that a "public transaction," as in a spin out through an initial public offering, is the "most likely" outcome for its animal health business.
Pfizer denied reports of an imminent agreement, instead asserting in a statement that the process of exploring strategic alternatives for the two divisions is ongoing. "We're currently pursuing the activities associated with evaluating all options," Pfizer said. "That said, no decisions have been made at this point."
Nestlé spokesman Robin Tickle declined to comment on the Pfizer auction, as did Agnès D'Anthonay, a spokeswoman for Groupe Danone SA, which also participated in the bidding.
For Pfizer, the potential strategic moves come as no surprise. Pfizer CEO Ian Read officially sent word in July that both the animal health and nutrition businesses would be divested as the pharma giant -- bedeviled by flat stock prices for years and the looming patent expiration of its crown jewel, Lipitor, the cholesterol drug that pulls in $10 billion in annual sales, moved toward a massive restructuring. Read envisions Pfizer as a truly pure-play pharmaceutical company.
The company has long been known for its mega-mergers, growing ever larger through massive buyouts of companies including Warner-Lambert Co. ($114 billion), Pharmacia ($57 billion) and Wyeth Inc. ($68 billion). But investors have clamored for a breakup as Pfizer's drug pipeline has thinned out.
That reshaping and paring-down appears to be fully under way for Read, who began his tenure in December 2010 with a goal of cutting billions in R&D spending and maximizing the value of Pfizer's various business units. Pfizer hasn't made a large-scale acquisition since Read took over, and has instead gone in the other direction, shedding its capsule making business, Capsugel Belgium NV, to Kohlberg, Roberts & Co. LP for $2.38 billion in April and considering more sales through the animal health and nutrition divestitures.
Goldman, Sachs & Co. analyst Jamie Rubin wrote in a research note in late March that Read has even expressed an openness to further separations down the line. Rubin hypothesized that Pfizer may be on its way to a full-scale breakup, eventually putting all its divisions into a branded pharma business and a generics company and then splitting the two, financial engineering moves that bring to mind those carried out recently by Abbott Laboratories and Covidien plc.
Investors endorse the strategic shift. Pfizer's stock traded at $22.42 per share early Monday, compared to the $15 to $16 per share price it was fetching in late 2010.
As for Nestlé, should the Vevey, Switzerland-based company outbid Danone and Mead Johnson Nutrition Co., as predicted in news outlets including the Wall Street Journal, its purchase of the Pfizer unit would add an infant formula business with $2.1 billion of sales last year. Around 90% of the Sfr7.2 billion ($7.83 billion) of revenue Nestlé derived last year from its nutrition unit comes from infant nutrition, which for years gave Nestlé a serious PR problem because of its push into developing countries with unsafe water supplies. Nestlé group sales last year totalled Sfr83.6 billion.
Jon Cox, of Kepler Capital Markets in Zurich, said the rumored price of as much as $10 billion "looks a bit heady" and would equate to close to 20 times the Pfizer nutrition unit's Ebitda.
"As always with Nestlé, it is thinking long-term strategically and the acquisition probably makes sense, even though the multiple will raises eyebrows," he added.
Cox predicts antitrust issues for the Swiss company in Latin America, where he sees Danone as the most likely buyer of divested assets, as well as potentially in South Africa and the Philippines.
He also said the frothy valuation of the Pfizer nutrition unit may benefit Danone's own stock market valuation.
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