Nestlé agreed on Monday to purchase Pfizer’s (NYSE:PFE) infant nutrition business for $11.9 billion in an attempt to expand the company’s presence in the global baby food market.
The acquisition will help the Swiss food giant tap into the growth of the emerging markets. Currently, Nestlé has a large infant nutrition business in Latin America and is planning to add operations in the Asia-Pacific region and the Middle East. Pfizer’s nutrition business generates 85 percent of its revenue from emerging markets.
Pfizer Nutrition was put up for sale in July along with Pfizer’s animal health business. The decision is a move for Pfizer to focus on its core drug-making operations. Last year, the Pfizer unit reported revenue of around $2.1 billion, a 15 percent increase compared with that of 2010.
Under the transaction, Pfizer will be able to offload the nutrition business that it acquired through it $68 billion takeover of Wyeth in 2009. Pfizer also sold a division that makes capsule coatings for drugs to Kohlberg Kravis Roberts (NYSE:KKR) for roughly $2.4 billion.
The deal is Nestlé’s largest acquisition. According to Thomson Reuters, the transaction takes the combined value of global takeovers in the food and beverage industry to $28 billion. The figure represents a 33 percent decline over the same period in 2011.
Nestlé said it expects $160 million of annual cost savings by the fourth year after the deal closed, while implementation costs are expected to come in around $300 million. Nestlé announced it would pay for the deal through cash reserves and existing credit facilities. The Swiss food giant announced that it was paying 19.8 times the Pfizer unit’s estimated pretax profit for 2012.
Pfizer’s chief executive Ian Read said in a statement that Pfizer’s intention is to generate the greatest value for shareholders by maximizing the value-creation potential of his businesses and manage the company’s capital allocation under the sale of the nutrition business to Nestlé.
The costly deal will have long-term benefits for Nestlé, giving it greater exposure to the fast-growing Asian markets. Nestlé has said that it expects the nutrition unit to generate revenue of $2.4 billion this year. However, the unit is big enough to present antitrust challenges for Nestlé, and the company may have to make some divestitures to win regulatory approval.
The transaction is expected to close by June 2013, pending regulatory approval.