Katy Askew

Comment: Nestle turns to emerging markets, Wal-Mart allegations hit the top

By Katy Askew | 30 April 2012

Last week started with a bang, when on Monday morning (23 April) Nestle announced that it had beaten off competition from the likes of Danone to secure the baby food business of US pharmaceuticals group Pfizer.

The news brought to an end months of speculation, with reports suggesting a fierce auction process that saw some heavy hitters in the world of baby food slogging it out to acquire the business.

Nestle paid US$11.85bn - or 19.8x 2012 estimated EBITDA - for the unit. Analysts and the investment community have widely suggested that this price was too high, as it is expected to have a slight downside for shareholders in the short-term.

However, with some clear signs that Pfizer was determined to realise the best price possible for the business, it seems likely that Nestle management was left with little choice but to pay the piper or give way to Danone, who had reportedly upped its competing offer on Friday in a last-ditch attempt to derail Nestle's plans.

On closer inspection, while the price was on the expensive side, some other factors could arguably be included in calculations to bring down the deal's multiples, Alain Oberhuber of Swiss advisory firm MainFirst told just-food. Nestle expects around $160m in synergies per annum. So, 2012 estimated EBITDA of $600m plus the synergies reduce the multiple to 15.1x.

The move is also a reflection of Nestle's focus on long-term gains. It will transform Nestle's infant nutrition business from one based solidly in developed markets to one that has turned its face towards emerging markets.

Pfizer Nutrition operates in more than 60 countries globally and 85% of sales are generated in emerging markets, meaning the acquisition effectively fills in the blanks on the map for Nestle. The deal will catapult Nestle from a weak number five position in China to being the number one or two baby food maker in the country.

The acquisition could well prove the first salvo in a rash of potential M&A in the lucrative infant nutrition sector, as Nestle's rivals respond by shoring-up their emerging market presence. Expect consolidation in the market to intensify in the coming year.

From the world's largest food maker to the world's largest retailer, Wal-Mart was not fairing so well in emerging markets last week. The company has been rocked by suggestions that it routinely greased the hands of government officials in Mexico until 2005.

The allegations, which first appeared in the New York Times, could have some far-reaching consequences for the company.

The firm's Mexican business, Wal-Mart de Mexico y Centroamerica, is being investigated by the Mexican authorities and as a result Walmex could find it more difficult to maintain its rapid rate of store openings, which have been the group's primary growth-driver.

However, the impact of the allegations on Wal-Mart could reach beyond just one market.

If the corruption charges are found to stand-up, the group would have violated the US Foreign Corrupt Practices Act and broken Sarbanes-Oxley rules that require companies to report material violations of securities laws. In this event, US regulators would likely levy some significant fines on the retailer and Wal-Mart could have to contend with a barrage of shareholder lawsuits.

Moreover, the allegations reach up to encompass some of Wal-Mart's highest ranking officials.

The claims implicate Wal-Mart vice chairman Eduardo Castro-Wright as being at the centre of the bribery as he was CEO of the group's Mexican operations at the time.
While it is believed that Wal-Mart's head office did not know of, or authorise, the payments when they were being made, it has been suggested that officials as high-ranking as CEO Mike Duke and former CEO Lee Scott were made aware of the issue in 2005 and then effectively swept it under the carpet.

The group last week confirmed that it is launching a review of its world-wide operations and is creating the new post of global FCPA compliance officer to ensure compliance with US anti-corruption legislation.

On the one hand, this does seem rather like Wal-Mart has closed the stable door after the horse has already bolted. On the other, there is the concern that any such investigation could uncover further evidence of corrupt behaviour in additional markets.

Add to this suggestions that the news could see fresh markets, notably India, closing their doors to Wal-Mart and it is clear that the shock-waves of the scandal will be felt throughout the organisation.

Sectors: Baby food, Emerging markets, Retail

Companies: Nestle, Pfizer, Danone, Walmex

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