Nestle Passes on Dessert as Its CEO Skips Straight to Coffee

(Bloomberg) -- Nestle SA Chief Executive Officer Mark Schneider keeps cutting the sugar and fat. The question is what he’ll add to spur growth at the world’s biggest food company.

In the CEO’s second-biggest disposal, the Swiss company sold its U.S. ice cream business to a joint venture with private equity firm PAI Partners for $4 billion.

That adds the Haagen-Dazs and Drumstick brands to Baby Ruth and Butterfinger chocolate bars on Schneider’s list of disposals, with luncheon meat maker Herta and two ailing Chinese candy and food brands still on the block. Nestle further bolstered its cash pile with a $10 billion sale of its skin health business earlier this year.

Schneider has said he’s focusing on growth categories like coffee, pet food, baby nutrition, water and consumer health. At Nestle’s most recent financial update, he signaled an appetite for deals. Since taking over almost three years ago, however, he’s done more selling than buying.

Therein lies Nestle’s conundrum: The maker of Nescafe and Stouffer’s frozen food already enjoys a dominant position in many markets, meaning large purchases would be complicated by competition concerns. Smaller deals won’t move the needle much.

Size Constraints

“Nestle is a bit more constrained when it comes to big acquisitions, because in the areas they want to grow they’re already a very strong player,” said Patrik Schwendimann, an analyst at Zuercher Kantonalbank.

Schneider’s largest acquisition so far was last year’s $7.2 billion splurge on the right to market Starbucks products, including coffee capsules for the Nespresso system. Nestle has also paid $2.3 billion for dietary supplements maker Atrium Innovations.

But Nestle is sitting on loads of cash, and its current $20 billion share buyback program could be scaled down in the case of sizeable acquisitions. The company also has a 23% stake in L’Oreal SA that could be sold to finance purchases. Some investors have taken the Atrium deal as a sign Schneider is planning to expand in consumer health.

“I expect a bigger acquisition -- the question mark is on timing,” said Alain Oberhuber, an analyst at MainFirst Bank. He anticipates further divestments next year before Schneider moves to make a large acquisition in medical nutrition or health sciences around 2021.

A Nestle representative declined to comment.

The ice cream deal bolsters a joint venture called Froneri, which was created in 2016 when the Swiss company merged European frozen dessert brands with PAI-owned R&R. It creates a stronger challenger to Unilever, the global leader in ice cream with the Ben & Jerry’s and Magnum brands.

For Nestle, however, the sale marks another retrenchment in the U.S. Possible targets include Danone’s medical-nutrition business or Fresenius Kabi’s nutrition unit, which could be worth $2 billion to $6 billion, Oberhuber estimated. One purchase that might require Nestle to sell its L’Oreal stake would be a move for Abbott Laboratories’ infant- and medical-nutrition businesses, which could fetch some $30 billion, he estimated.

Chief Financial Officer Francois-Xavier Roger recently signaled that Nestle could also make acquisitions outside the product segments Schneider has targeted. At a Sanford C. Bernstein conference in September, he pointed to the strong performance of KitKat chocolate and the Maggi soup and seasonings business in emerging markets after being asked whether dealmaking activity should be expected to focus on the core categories.

Sauces, Flavorings

Maggi is growing more than 10% in emerging markets. Strong growth in Asia for oyster and soy sauces could make flavorings one area to expand in outside core categories, according to Nico von Stackelberg, an analyst at Liberum.

If no big targets turn up, the company is expected to continue buying in niche areas like vegan food that it’s bolstered over the past few years.

“Lacking the opportunity of big acquisitions, smaller ones could be found in local coffee brands, for example in emerging markets, or the plant-based space,” Zuercher Kantonalbank’s Schwendimann said.

To contact the reporter on this story: Corinne Gretler in Zurich at cgretler1@bloomberg.net

To contact the editors responsible for this story: Eric Pfanner at epfanner1@bloomberg.net, Anne Pollak

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