Comment: Could Pfizer be playing hardball over baby food?

Anticipation is mounting over the likely sale of Pfizer's baby food business, with an announcement widely expected next week.

The general sentiment is that Nestle has emerged as the frontrunner to acquire the business, although Danone is also believed to be showing a degree of interest.

According to a number of reports, which have cited people "familiar with the situation", Nestle is expected to win through with a bid understood to value the infant formula unit at roughly US$9-10bn.

While Pfizer does not publish details on the unit's EBITDA, Bernstein analyst Andrew Wood estimates that, with a price tag of around $9bn and assuming an EBITDA margin of 20-25%, the deal's multiples would total 17-22x EBITDA. This range would make it slightly more expensive than Nestle's 2007 acquisition of Gerber (which, Wood suggests, is fair given the unit's emerging markets presence).

"Overall, this deal makes huge strategic sense for Nestle. It is in the right categories and the right markets and with a reasonable price (17-18x EBITDA would be "reasonable"), we would expect a fairly positive reaction from investors. However, if the multiple starts to reach levels close to 22x EBITDA (the higher end of our range), and despite the fairly small negative EPS dilution, it would enhance Nestle's reputation of being "loose" with investor money," Wood says.

When talking to Pfizer yesterday (18 April) it was interesting to note a change in tone and emphasis from the group's corporate communications department - one that suggests that the firm could be playing hardball over price.

Now, as a journalist one becomes quite accustomed to translating "corporate speak", a special language employed by large companies when they don't want to give very much away.

The statement we were given yesterday bore some remarkable resemblances to one that Pfizer provided us with back in February. Both statements insisted that the group is still in "the process" of "exploring strategic alternatives" for the infant nutrition business and both said that these alternatives included "sale, spin-off or other transaction". Both statements also provided the same timetable: a decision will be announced in 2012 and the transaction will be completed between July 2012 and July 2013.

However, in a notable departure from its previous line, Pfizer yesterday chose to comment on the value of the business and its determination to get maximum returns from any transaction.

"The nutrition business is a highly valued asset, and our decision about strategic options will be driven by value creation for the business and delivering the best after-tax value for our shareholders," Pfizer said.

This subtle change in tact certainly left me wondering if talks over price are still ongoing, with Pfizer's rhetoric suggesting that it is attempting to put the squeeze on any potential buyer.

And, in spite of Nestle's reputation for being pretty free and easy with investors' cash, the group's recent history certainly suggests reasonably tight capital expenditure management. 

This combination could well make for interesting negotiations and perhaps means that an agreement is less done-and-dusted than reports indicate.