Nestle to recapture China market

Nestle SA, the Swiss company, said to be preparing a bid for Pfizer Inc. (PFE)’s baby-food unit, may aim to regain momentum in China’s infant formula market by acquiring the maker of SMA Gold.Buying the business would propel Vevey, Switzerland-based Nestle to No. 3 from No. 6 in China’s infant-nutrition market, Sara Welford, an analyst at Citigroup Inc. in London, said by phone. It would also offer potential cost savings equal to 10 per cent of the unit’s sales, she estimates.Nestle is the global leader in infant nutrition, the fastest-growing segment of the packaged-food industry. It’s lost market share in China since 2005, when it withdrew two varieties of Neslac milk powder because authorities found they contained too much iodine. Pfizer, the fourth-biggest baby-food company in the country, said July 7 it may sell or spin off its nutrition unit, sparking interest from Nestle, Danone SA and Abbott Laboratories, according to people with knowledge of the process.“China is the single most attractive baby-food market and the company has been losing share there,” said Ildiko Szalai, an analyst at Euromonitor International in London, who estimates that Nestle’s share of the market shrank by a third to less than 6 per cent from 2005 through 2009. “It’s a priority for them.”Global sales of baby-food products are likely to gain 6 per cent a year from 2010 to 2015, according to Euromonitor, which says that growth is being helped by low private-label penetration and the importance of infant nutrition to consumers. China’s baby-food market grew about 21 per cent last year to more than 42.1 billion yuan ($6.5 billion) and will probably expand about 17 per cent a year from 2010 to 2015, the researcher estimates. Mead Johnson Nutrition Co. (MJN) had an industry-leading share of about 13 per cent in 2009, it says.Pfizer’s baby-food business, gained through its 2009 purchase of Wyeth, had $1.9 billion in sales last year and according to people familiar with the matter may fetch $10.5 billion in a sale. The unit makes the SMA Gold line of products for infants and children and Enercal supplements for adults.Nestle stepped up expansion in China with the $1.7 billion purchase in July of a 60 per cent stake of Hsu Fu Chi International Ltd., the country’s biggest confectioner by market value. The maker of Gerber baby food aims to boost the portion of sales it gets from emerging markets to 45 per cent by 2020 from about 40 per cent. Unilever, the maker of Magnum ice cream, gets about 54 per cent from developing regions.Nestle has made 19 acquisitions since the end of 2009, according to Bloomberg data. The company has said it plans to use its cash of more than 16 billion Swiss francs ($21 billion) to invest in existing businesses and make “bolt-on” acquisitions. Spokeswoman Melanie Kohli declined to comment on whether Nestle would be interested in acquiring the Pfizer unit.A purchase of the business may boost profit by about 2 per cent within three years, according to Citigroup’s Welford. So-called organic sales at Nestle’s nutrition unit probably rose 8.8 per cent in the first half of 2011, according to Jean-Philippe Bertschy, an analyst at Bank Vontobel in Zurich.Nestle, the world’s biggest foodmaker, is scheduled to report first-half earnings tomorrow. Net income probably fell to 4.61 billion Swiss francs, according to the average estimate of 11 analysts compiled by Bloomberg, hurt by higher raw-material costs and marketing spending. So-called organic sales, which exclude acquisitions, disposals and currency shifts, rose 6.5 per cent, the estimates show.Nestle last year got 10.4 billion francs, or about 10 per cent of revenue, from nutrition brands such as Cerelac and Nestle Nan. The unit makes products ranging from formula milk for babies to cereals and snacks for toddlers.Paris-based rival Danone, which produces Bebelac formula milk, generated about 3.36 billion euros ($4.8 billion), or 20 per cent of sales, from baby nutrition products in 2010.  Revenue from the business increased about 10 per cent in the first half. From / Gulf Today