Nestle has grabbed the early M&A headlines in 2010 with a sale of its stake in eye-care firm Alcon and with the gobbling up of Kraft Foods' pizza business across the Atlantic. The Swiss food giant's deal with Kraft nixed any rumours that it would use the Alcon cash to fund a sortie for Cadbury but, as Michelle Russell reports, the acquisition has cast questions over the world's largest food group's commitment to health and wellness - and its future M&A ambitions.

Nestlé has had a busy start to 2010. The Swiss food giant's move yesterday (5 January) to scoop up Kraft Foods' frozen pizza business in the US and Canada came just a day after it sold its remaining stake in Alcon to health-care giant Novartis.

The US$28bn Alcon disposal caused some premature predictions that Nestle would swoop on Cadbury but the group's pizza deal with Kraft - and its announcement - that it would not bid for the UK confectioner put paid to the speculation. However, whispers over the possibility of future acquisitions from Nestle are growing louder.

The two transactions garnered a mixed reaction from the analyst community, many welcoming the moves, others suggesting the pizza purchase was far removed from the Swiss food giant's oft-repeated focus on health, wellness and nutrition.

The deal with Kraft includes brands such as DiGiorno and California Pizza Kitchen and provides Nestlé with a new "strategic pillar" to its frozen food portfolio in the US and Canada.

Kepler Capital Markets analyst Jon Cox believes Nestlé's pizza acquisition was a "good deal". He concedes, however, such a comment might not be "fashionable" - given Nestle sold a "very fast growing health company with an excellent margin" the previous day.

"Pizza doesn't compare, that's pretty obvious," Cox said. "But if you look at the multiple they paid and what they're talking about getting - up to a 20% operating margin - then I think it will be a plus to their overall portfolio."

With sales of around CHF3bn (US$2.91bn), the purchase allows Nestlé to become a global leader in an attractive, fast-growing frozen pizza category, where the firm currently only has a minor presence. It will also build on Nestlé's existing pizza operations in Europe.

Claudia Lenz, an analyst with Bank Vontobel, said that while the deal was not what many had expected, it was a good acquisition - and was consistent with Nestle's "health and wellness" blueprint.

"If you think about pizza, you don't think about nutrition and as we know Nestlé has spent a lot of time convincing people that they are becoming the world's leading health, wellness and nutrition company," Lenz said.

"But in the end you can always argue that products like frozen pizza can also be nutritious by adding better ingredients, so it's not really a break with the strategy of health, wellness and nutrition. What's important for me is that they do acquisitions in their core business and their core business is food and beverage."

However, while many analysts have welcomed the pizza acquisition as a way of expanding in an attractive category, Sanford Bernstein analyst Andrew Wood doubts the takeover was such a good strategic fit.

"This acquisition goes against Nestlé's strategic focus on health, wellness and nutrition," Wood says. "Nestlé is trying to make the argument that it can add or improve the nutrition in frozen pizzas, as it does in other categories, which may be true - but then this could be applied to just about any food category, and makes the health, wellness and nutrition focus on M&A too broad to be of any use."

Wood added that continued "non-nutrition deals" could ultimately "dilute" Nestlé's "pure" nutrition business to an extent that the firm could become "just another broad-based food company trying to improve the nutritional impact of all of its products".

Amid the continued M&A speculation, Nestle intends to use part of the Alcon windfall to buy back CHF10bn of shares. Wood also believes the proceeds will be used for deleveraging but he pointed out that Nestle's M&A budget guidance is "inconsistent and difficult to interpret".

"Despite guidance of a CHF2-3bn M&A budget for 2010 (reiterated as recently as yesterday), Nestlé's actions, and an acquisition valued at $3.7bn, seems to suggest that this guidance is only until something else comes up," Wood says.

"Nestle's frequently-reiterated budget was a useful mechanism to assuage those concerns but today's move suggests that this guidance can be, and will be, easily over-ridden if circumstances dictate, which again makes the budget figure of little use."

Nestle's ambition to become a business focused on health and wellness has become something of a mantra and was the reason for some scepticism over talk that it could bid for a confectionery business like Cadbury.

However, Wood suggests the Kraft pizza deal indicates health and wellness is "clearly not as relevant as we had first imagined".

"As one investor remarked to us today 'I guess artificial ingredient laden pizza must be healthier for you than chocolate', Wood remarks. "Slightly less acerbically, we would question why a developed market frozen pizza business is a better acquisition than an emerging market focused confectionery business."

Elsewhere, there is a broad consensus among analysts that health and wellness will continue to inform Nestle's acquisition strategy. With many consumer watchers predicting that health will grow in importance for shoppers, Nestle would be wise to hone in on nutrition.

However, some do see the world's largest food maker continuing to look at opportunities in the wider packaged food sector.

Cox argues that chocolate-maker Lindt & Sprungli could be a target for a Nestle. "I suspect maybe this year [Nestle] will be more interested in Lindt than Cadbury. In terms of sizeable deals, Lindt would be interesting for them in terms of a premium chocolate producer, rich multiples but on the back of weak earnings, so that's probably the biggest thing they would do if they wanted to."

With the credit remaining tight and many food manufacturers too busy focusing on operations to devote time for business development, it has fallen to the biggest food company of all to provide the first M&A headlines for 2010.

A year of battling recession is likely to mean more takeover targets emerge this year and it is clear that, whatever Nestle's intentions, the company has the financial firepower to pounce.

More to come....