Nestle Top Candidate to Buy Chinese Infant Formula Business

Swiss food major Nestle and French group Danone are in a race to acquire the Wyeth infant nutrition business. This asset is valued at approximately $10 billion and has been put on the block by Pfizer (NYSE:PFE).

Mead Johnson (NYSE:MJN) and Heinz (NYSE:HNZ) are also in line, but Nestle, with its AAA rating and low debt, is the favorite to win the unit, prized for its foothold in the fast-growing and high-margin Chinese baby food market. “The key strategic attraction in our view is Pfizer’s position within the $6 billion Chinese infant formula market… The market is unusual in having super-charged Chinese growth rates as well as highly attractive margins,” said analyst Robert Dickinson at brokers Citi.

Pfizer’s business boasts of a $2.1 billion turnover growing a decent 8 percent clip on the back of the renowned SMA Gold brand. According to Credit Suisse analyst Robert Moskow, the unit could be valued at $10 billion or 17.8 times its historic EBITDA profit. “Assets as good as this do not come along very often. Nestle has deeper pockets than Danone and we would not expect them to give up on this deal. It is Nestle’s deal to lose,” said one banker working on the auction.

However, both Danone and Nestle would have to contend with regulatory hurdles on their side, and Pfizer would face a capital gains problem in the event of a sale. It is apprehended that if a suitable structure to handle the tax issue is not found, Pfizer may ultimately be forced to cancel the sale.

Here’s how these shares are trading now:

Pfizer Inc. (NYSE:PFE): PFE shares recently traded at $20.99, up $0.04, or 0.19%. They have traded in a 52-week range of $16.63 to $22.17. Volume today was 14,536,451 shares versus a 3-month average volume of 46,116,600 shares. The company’s trailing P/E is 16.38, while trailing earnings are $1.28 per share.

Mead Johnson Nutrition Company (NYSE:MJN): MJN shares recently traded at $75.29, down $0.45, or 0.59%. They have traded in a 52-week range of $55.12 to $77.40. Volume today was 268,580 shares versus a 3-month average volume of 2,302,010 shares. The company’s trailing P/E is 30.52, while trailing earnings are $2.47 per share.

HJ Heinz Co. (NYSE:HNZ): HNZ shares recently traded at $51.99, down $0.17, or 0.33%. They have traded in a 52-week range of $46.99 to $55.00. Volume today was 414,328 shares versus a 3-month average volume of 1,913,580 shares. The company’s trailing P/E is 17.57, while trailing earnings are $2.96 per share.