Health-conscious Nestlé sells US candy to Ferrero for $2.8 billion

19 January, 2018 by
FMCG Business

Swiss food group Nestlé (NESN.S) has agreed to sell its U.S. confectionery business to Italy’s Ferrero for $2.8 billion, marking CEO Mark Schneider’s first big sale and a small step on its path towards healthier products.

Nestlé, the world’s biggest packaged-food company, has cited the unit’s weak position in the United States, where it trails Hershey (HSY.N), Mars Inc and Lindt, as the rationale for a sale.

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For family-owned Ferrero, the cash deal offers a chance for the Italian company to build scale quickly in that key market, where it has done two other deals in the past year. The maker of Nutella spread and Ferrero Rocher pralines will become the third-largest chocolate company in the U.S. and globally, according to Euromonitor International.

For Nestlé, which first sold milk chocolate in the 1880s, a consumer shift away from junk and sugary foods has led the Swiss company to focus on “nutrition, health and wellness”, although it says it is committed to its non-U.S. confectionery business.

However, bankers and analysts have speculated that it could dispose of other weak brands, or even step away from candy altogether by forming a joint venture as it recently did in ice cream. Hershey, which owns Nestlé’s KitKat brand in the United States, would be the obvious partner, one banker said.

The deal only accounts for about 1 percent of Nestlé’s sales, but is part of a larger shake-up by chief executive Schneider, a healthcare industry veteran one year into the job.

Schneider has been tasked with accelerating Nestle’s growth strategy in an increasingly tough environment for multinational food companies due to slowing growth and greater competition from niche, upstart brands.

Nestlé’s mass-market chocolate bars, such as BabyRuth, Butterfinger and Crunch, have underperformed rivals for years as consumers have turned towards healthier snacks such as fruit bars and premium chocolate brands such as Lindt (LISN.S).

Nestlé said last week it was selling Australian chocolate bar Violet Crumble. The company is expanding into consumer health, bidding for the vitamin and supplements business being sold by Germany’s Merck (MRCG.DE) after agreeing last month to buy vitamin maker Atrium Innovations.

“The switch of assets makes a lot of sense,” Vontobel analyst Jean-Philippe Bertschy said of the moves out of U.S. chocolate and into vitamins. “You’re going out of a weak business in terms of financials and … entering a market with strong growth and higher margins.

Nestlé paid $2.3 billion for Atrium, which has about $700 million in annual sales. The chocolate business, which it is selling for $2.8 billion, has about $900 million in sales.

Liberum analyst Robert Waldschmidt estimates the deal represents a multiple of roughly 20.7 times earnings before interest, tax, depreciation and amortization, which he said “feels like quite a top multiple”.

Source: Reuters