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Raising the bar

17 October 2013 By Robert Cole

It is easy to see why Nestle might want to do deals. The Swiss food group is finding it hard to deliver on sales growth targets. And it can afford to buy itself out of trouble.

True, the picture is far from being universally bad. In the Americas, Asia and Africa, organic sales grew at more than 5 percent in the first nine months of this year. The challenging market is Europe, which dragged down overall organic growth to just 4.4 percent at the nine-month mark – against Nestle’s long-held target of growing at least 5-6 percent.

A sensible deal could pep things up – either by buying faster growing sales, or by providing an opportunity for cost cuts. Ferrero, the family-owned maker of Nutella chocolate spread, swiftly denied a report on Oct. 17 that Nestle had made an approach which could have valued the Italian company at 10 billion euros or more.

It may seem odd that Nestle would even consider buying in its most challenging geographical region. But a sizeable European acquisition could yield savings and synergies in, say, innovation. And while Nestle sometimes appears to be in too many businesses, Ferrero is in Nestle’s traditional chocolatey sweet spot.

Nestle has a strong balance sheet. Net debt, which is about equivalent to annual EBITDA, is modest. If it sold down its chunky stake in cosmetics group L’Oreal, its M&A budget could quickly swell to double-digit euro billions. Abbott Nutrition has been tipped as a suitable target by analysts at Societe Generale.

So Nestle’s growth is mixed as things stand and the group is in a strong position as an acquirer. Ferrero may be off limits for now, but Nestle’s advantages as a buyer will not count for much unless it puts them to use.

 

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