January 16, 2018 / 8:25 PM / a year ago

Breakingviews - Sugar-for-supplements swap will test Nestlé boss

Los Angeles Lakers star Kobe Bryant is shown on a jar of Ferrero brand Nutella Hazelnut spread in this picture taken August 5, 2003. REUTERS/Tim Shaffer

LONDON (Reuters Breakingviews) - Nestlé is parting ways with LaffyTaffy and Runts. The Swiss food group agreed on Tuesday to sell its U.S. candy brands to Italy’s Ferrero for a sweet $2.8 billion to invest in products with better growth prospects than junk food. But high valuations for alternatives like vitamin pills limit new boss Mark Schneider’s opportunities to make Nestlé a clean-living champion.

Privately owned Italian chocolatier Ferrero is paying richly to bulk up on brands like Butterfinger and Babyruth. The price is twice the multiple of EBITDA that Unilever secured in selling its slow-growth margarine business to private-equity group KKR in mid-December, or roughly 20 times, according to a person close to the deal. Ferrero gets the third spot behind Hershey and Mars in a troubled U.S. confectionery market that is currently growing at just 1 percent per year, based on Euromonitor data.

Nestlé’s newish boss will now plough the proceeds into more attractive and higher-growth products like pet food, bottled water and consumer healthcare, singled out for focus during the company’s strategy day in September. He has spent $2.3 billion on probiotics maker Atrium Innovations and is front-runner to buy German drugmaker Merck’s healthcare business, Bloomberg has reported, which makes Seven Seas nutritional supplements.

Still, high valuations make the sugar-for-supplements swap that bit trickier to pull off. Take the Merck consumer-healthcare business. At a mooted price of $5 billion, or 4.7 times sales, the business would generate a post-tax return on investment of just 4 percent, based on the operating profit margin of below 25 percent that analysts reckon big pharma groups get from their consumer arms. In the search for top-line growth that may seem less than important. But moderation is healthy in all things – not just sugar.


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