Katy Askew

Comment: Nestle pays the piper with Pfizer deal

By Katy Askew | 23 April 2012

Announcing its US$11.85bn acquisition of Pfizer's baby food unit this morning (23 April), it was interesting to note that Nestle took a slightly unusual tact in presenting the deal multiples. 

Speaking during a conference call, CFO Wan Ling Martello said the Pfizer Nutrition business has a "proven track-record of profitable growth". 

The company said it expects Pfizer Nutrition to grow its sales from $2.2bn in 2011 to $2.4bn in 2012. With an EBITDA margin expected to remain stable at 25%, Nestle was therefore able to predict an increase in EBITDA from $500m last year to $600m this year. 

All well and good. 

But, in a slightly unusual step, Nestle said the acquisition price represents 19.8x 2012 estimated EBITDA. This is on the high-side of a range that one analyst termed a "reasonable" price tag. 

However, if we look at 2011 - the last full year that financial data is available for - suddenly the deal seems rather more expensive, at 23.7x EBITDA. 

At this kind of level, Nestle is certainly at risk of augmenting its reputation among some analysts as being free with investors' money. 

As our coverage suggested last week, the price tag looks set to be quite a bit higher than the $9-10bn that reports had suggested given the level of competing interest (from the likes of Danone, which reportedly upped its offer in a last ditch attempt to win through) and Pfizer's determination to get "maximum value" for the unit. 

And the strategic logic of the deal speaks for itself. With the buy, Nestle extends its lead in a fast-growth, high-margin business and significantly ramps up its presence in emerging markets. 

So, while the price tag might mean that immediate returns to shareholders are not what the market might have hoped, in the long term it is good news for Nestle.  

Sectors: Baby food, Mergers & acquisitions

Companies: Nestle, Pfizer, Danone

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