Nestle may target Mead Johnson Nutrition for acquisition after US$11.4B in stock repurchases failed to slow decline in shareholder value, analysts say

Andrew Rogers

LOS ANGELES , September 14, 2011 (Industry Intelligence) – Nestle SA may target Mead Johnson Nutrition Co. for acquisition after repurchasing more than US$10 billion in stock failed to slow a decline in shareholder value, Bloomberg reported Sept. 14.

Nestle spent 10 billion Swiss francs (US$11.4 billion) on stock repurchases in the past 14 months, but the company will stop buying shares and may consider acquisitions instead, Chief Financial Officer James Singh said last month when the currency hit a record.

The company lost 5.4% in the buyback period while its competition gained. Nestle’s revenue is expected to fall this year, but the franc’s appreciation is now making acquisitions cheaper, according to James Investment Research Inc.

Purchasing Mead Johnson would assist Nestle in stimulating growth and rebuilding business in China, the only major market where Nestle isn’t one of the largest distributors of infant nutrition after Chinese authorities discovered too much iodine in its products in 2005.

Pfizer Inc. is currently delaying the sale of its baby formula unit, according to sources with direct knowledge of the plan, but a deal for Mead Johnson would provide Nestle with more than half of the baby food market in the U.S., according to Euromonitor International.

Nestle has repurchased 25 billion francs in stock, a 6% gain, over the past three years. The Swiss currency has appreciated 14% over the past year, according to data collected by Bloomberg.

Nestle reported 87.9 billion francs in revenue last year and analysts are predicting that the company’s revenue will decline by more than 5% this year. The company plans to stop buybacks and pursue acquisitions to try and bolster growth, and that makes a purchase offer for Mead Johnson, which is projected to grow its earnings twice as much as Nestle in 2012, a good possibility this year, Nomura Holdings Inc. analyst David Hayes said.

Nestle is the largest distributor of infant nutrition globally, but it lost market share in China when it was forced to withdraw two varieties of its Neslac milk powder due to high levels of iodine. Mead Johnson had an 11.7% share of China’s market last year, Euromonitor data shows.

A purchase of Mead Johnson would help Nestle more than double its U.S. market share in baby food to around 58%, and would enable the company to market its Gerber baby food to customers who use Mead Johnson’s Enfamil formula as babies move from milk to purees and solids, Hayes said.

The primary source of this article is Bloomberg, New York, New York, on Sept. 14, 2011.

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