by Will Ashworth | November 15, 2013 12:18 pm
Jenny Craig is out the door at Nestle (NSRGY). A week ago, Nestle announced that it was selling the North American and Oceania (Australia, New Zealand and others in that region) segments of its weight management business to North Castle Partners, the owners of Curves fitness clubs for women, which will combine the two businesses.
That’s the first shoe to drop.
Ever since Nestle announced in early October that it was selling some of its underperforming brands while fixing others — Nestle has more than 8,000 brands, 30 of which sell more than $1.1 billion annually — the investment world has been abuzz with speculation about which brands will be shown the door.
Now we know one of the casualties, but who are the others?
Here are four possible candidates, along with the likely suitors. Although private equity names always jump to the top of this type of M&A list, there are many strategic acquirers who might join in the party.
According to speculation, Power Bar is the next to go. Reuters estimates that Power Bar’s revenues are less than $200 million annually (1.7% of Nestle’s nutritional division revenue) and facing intense competition from Clif Bars, Kellogg’s (K) Special K bars, General Mills’ (GIS) LaraBar and others. When you’re in this kind of battle and your parent company wants to focus on bigger brands, you’re as good as sold.
The company I have in mind for Power Bar is Hain Celestial Group (HAIN), whose annual revenues in fiscal 2013 were $1.7 billion. At first glance, it probably doesn’t look like a good fit because Hain already has Health Valley granola and cereal bars in its cupboard of healthy brands. Furthermore, with the exception of the merger between Hain and Celestial in 2000, the company generally does smaller acquisitions — less than $100 million. Power Bar, although its market share is fading, would be a big nut to crack. Nonetheless, I expect Hain to express some interest.
Nestle has 64 bottled-water brands globally. Most people are familiar with names like Pure Life, Perrier and San Pellegrino. However, regional brands rarely have any recognition outside the regions where they are popular. Nestle generates 80% of its bottled-water business from Europe and North America, two places where Pure Life is a leading seller. If a deal does happen, expect those regions to be the focus.
As for buyers of the three brands, James Targett, an analyst with Berenberg Bank, believes Coca-Cola (KO) is at the top of the list. Dr Pepper Snapple (DPS) doesn’t have a big water business, so it’s also a likely candidate. Just don’t expect to see private equity firms go after these brands. Margins here are half Nestle’s other divisions, and these brands lack the kind of strategic fit that the Jenny Craig deal had for PE firms.
When you look at Nestle’s seven operating segments all but one are intended for humans. The company’s pet care business sticks out like sore thumb, despite being its second-most profitable business — behind only its powdered and liquid beverages division (Coffee-Mate, Carnation, Nesquik).
CEO Paul Bulcke feels that other brands are more in need of a fix than Nestle’s pet business. However, back in May, privately held Del Monte paid $341 million (1.1 times sales) for Natural Balance. If Nestle put Purina and the rest of its pet care business on the block, it could see as much as $13 billion, if not more.
Who could make such a deal? Warren Buffett, for one. Although the transaction is bordering on “too small” for Berkshire Hathaway (BRK.B), Purina is a nicely profitable midwestern company based in St. Louis, just 420 miles from Omaha. I have no idea if Buffett likes dogs and cats, but I know he likes making money, and this business continues to do so.
You read that correctly. Nestle owns 29% of L’Oreal (LRLCY), the world’s largest cosmetics company. It first invested in L’Oreal in 1974 and has been involved ever since. Nestle is currently in a deal with the Bettencourt family which requires each party to offer shares to the other before selling. But in April 2014, that deal will expire.
Any sale of Nestle’s stake would generate a huge asking price, which it would then use for share repurchases, etc.
While Warren Buffett might be interested, the obvious candidate to buy these shares is L’Oreal itself.
In addition to a ton of cash, it also owns 9% of drug company Sanofi (SNY). Analysts think a SNY deal to buy its stake from L’Oreal is a foregone conclusion, and I’m inclined to agree. If that happens, L’Oreal would have almost 11 million euros to partially finance the purchase, with debt taking up the balance.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
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