Strategic Merger — Consumer Goods Conglomerate and Medical Nutrition Business
- In Feb 16, Nestle has announced an acquisition of Zenpep, transaction price and terms have not disclosed yet
- Strategy expansion plan for Nestle to to expand Nestle Health Science departments as to complement their current product offerings
- Nestle’s hostile acquisitions and divestments actions have driven tremendous growth yet they have narrowed their focuses in a few segments only: petcare, coffee, plant-based food, online infrastructure and consumer healthcare (gastrointestinal, obesity, brain health etc)
Nestle (NESN.S) has announced an acquisition of Zenpep, a company provides prescription medication for people who have gastrointestinal problems with their pancreas. Which implies that Swiss giant has begun investing into their Nestle Health Science portfolio and expanding its share.
Nestle, alike P&G and CocaCola comprises a variety of brands from food, beverage to pet care and healthcare nutrition products. Majority of the brands were results of Nestle’s rapid acquisitions. In 2017 to 2018, over 18 M&A activities was held and in 2019, there was only 4 M&A activities whereas they were all held in the latter half of the year. In Oct 17 2019, Chief Executive of Nestle Mark Schneider has spoken Nestle is publicly seeking acquisitions.
Nestle’s Health Science is a relatively immature portfolio with Boost, Peptamen, Optifast, Nutren etc. Which major focuses on gastrointestinal, critical care and brain health etc. The acquisition of Zenpep primarily expand Nestle’s Health Science product mix and secondly aid complement its portfolio of therapeutic products.
On the flip side, Allergan, the parent of Zenpep has agreed upon the sale due to its illiquid cash position, the ongoing regulatory approval process of AbbVie’s (ABBV.N) $63 billion takeover. It has increased the likelihood of the deal because Nestle does not stand as a direct competitor yet Allergan demands capital to finance another deal.
The transaction details have not been disclosed by management yet Zenpep had sales of $237 million in 2018. On the date of transaction, Nestle’s stock has not react positively nor negatively, by isolating the effect of coronavirus began from the beginning of 2020, Nestle has been generating a stable cash flow and maintaining a healthy balance sheet.
The acquisition is likely to be underwhelmed by investors due to all the distressed macro-environment caused by coronavirus and interest rate emergency cuts.
Greg Behar, the head of Nestle Health Science said, “This is a significant opportunity for our business in the United States to add a complementary product to our existing range of nutrition products that support food ingestion, digestion and absorption”. Beyond the products, Zenpep is a subsidiary invested heavily by its parent, Allergan. Nestle has also rolled over some of their professionals to aids the Health Science portfolio in general, in additional to their greater exposure to consumer goods, Zenpep can greater enhance the development of their food & beverage services by help creating products that aid digestion or are digestion friendly.
The operation of Zenpep will not be heavily intervened by Nestle yet Zenpep will encounter several adjustments in terms of forward strategy but not operation and structural changes. Nestle’s operation will not change as conglomerate tends to have their subsidiaries operating independent. The values Nestle could give is the cross-selling, sales & marketing and research initiatives, instead of consolidating similar businesses.
Implication & Analysis
According to Nestle’s full-year result conference in February 13 2020, they have began matching their product offerings to growing trends which include caffeine products, plant-based food and health supplements, in additional to investing heavily to the digital distribution infrastructure. In the past (2015), Nestle witnessed increase in demand for ice cream, pet care and cereal and have expanded into these area. The growth was realized and was able to outpace the fall in carbonated soft drinks.
Nestle Health Science is a little more than just another product line with supplement offerings. Nestle Health Science adds value to every product segment in Nestle, with its ability to carry out scientific testings into ingredients used and provide professional guidelines from in a biological aspect. Today’s society, consumer needs have expanded beyond just price and quality but also the impacts towards physical health and environmental impact, therefore Zenpep’s human capital and products could contribute Nestle in a greater context.
In earlier November in 2019, Nestle has sold off its ice cream brands including Dryers, Haagen-Dazs and Drumsticks to a private equity firm PAI Partners for 4 billion. “Nestle has been up against Unilever for years,” said Duncan Fox, an analyst at Bloomberg Intelligence has emphasized that the intensified ice cream competition is no longer worth Nestle to invest so much into. First, the market demand for ice cream has shown signs of stagnation where the market is growing at CAGR of 3.8%. Secondly, Upstarts like Up Halo has also stolen a lot of market shares by marketing themselves as the healthier options, the brand recognition of Nestle’s ice cream brands may not be flavoured as much as consumers starting to shift towards healthier options. The 4 billion cash inflow from the divestment has pretty much covered the acquisition of Zenpep.
Catalyst & KPIs
Some investors have argued that Nestle will consider entering the consumer healthcare market, some argued that Nestle will continue its growth and sold off stagnated segments. Yet management has made it clear that their main focus is towards coffee, petcare and plant-based food where Nestle Health Science acts as a supplementary source and new business line.
In the short-term, coronavirus will continue to damage all facets of operations and sales. Nestle’s stock has dropped 10%, relatively less severe than UniLever (-18%) or Dow Jones (-23%). There weren’t massive selling activities by institution investors on Nestle and technology sectors have encountered much greater sell-off activities than consumer goods sector. With such diverse product mix and considering majority of the products are inferior goods, Nestle’s financial performance is anticipated to remain stable and less-affected than other service-driven businesses.
In the mid/long-term, the post-coronavirus activities will benefit Nestle as they are able to refinance at a lower interest rate and government is also likely to introduce policy that could help businesses like Nestle to boost economy. Aligning with industry growth, Nestle will further be able to capture more health-conscious consumers by introducing more plant-based and healthy products. Merger & Acquisitions would also be undertaken in a more rapidly speed as multiples are priced lower when the economy is weak than when the economy is strong, like 2008.
In the next article, I will be talking about Accenture, the biggest acquirer of companies in past 30 months, totalled 24 deals.