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Quality beat

21 October 2020 By Dasha Afanasieva

Giving up chocolate can further sweeten Nestlé. The $340 billion maker of Quality Street is seeing its food and drink business shrink even as it bulks up in pet care and health science. Exiting confectionery would be the next logical step and help Chief Executive Mark Schneider sidestep a sugar backlash.

Thanks to Covid-19 lockdowns, less food and drinks are being consumed on the go. Nestlé beat sales growth expectations on Wednesday, with revenue in the first nine months of the year rising 3.5% organically to 62 billion Swiss francs ($68 billion). But its sales of water declined almost 8%, excluding any impact from disposals, while confectionery shrunk 1.8%.

For Nestlé, the virus is accelerating a trend that was already in place. Schneider has prioritised animal care and health science as growth areas, acquiring pet food business Lily’s Kitchen and nutritional science companies Zenpep, Vital Proteins and Aimmune Therapeutics. He has sold the U.S. ice cream and confectionery businesses where Nestlé lacked market share.

Schneider’s next move could be a full exit of the unit that makes KitKats, which made up 8.5% of Nestlé’s sales last year. There’s some scope for a valuation bump. If the chocolate business were valued in line with Cadbury maker Mondelez International, which trades at an enterprise value of around 4 times 2019 sales, then it would be worth around $30 billion. Yet the remaining business, which would have a larger exposure to health, might then be valued more closely to pharmaceutical group Novartis or Reckitt Benckiser which trade above 4.5 times 2019 sales, rather than Nestlé’s close to 4 times multiple.

An exit would also help Schneider avoid a coronavirus-driven sugar backlash. Countries across the globe have already imposed 17 new sugar taxes since 2015, according to Schroders. Covid-19 makes more action likely. Governments need more cash to pay down debt, and are likely to try to clamp down on obesity given the link between weight and susceptibility to the virus.

Schneider doesn’t really need the cash. He has sold more assets than he has bought since taking the reins in 2017, and net debt is a low 33 billion Swiss francs. Spinning off the chocolate unit to shareholders, or else selling it down in chunks might be easier. KitKats are almost synonymous with Nestlé, yet they still deserve to be purged.


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