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China Milk Group Eyes Pfizer Baby Food Unit

Helen Thomas in New York, Anousha Sakoui in London and Patti Waldmeir in Shanghai

Mengniu Dairy, one of China’s largest milk producers, is considering a bid for Pfizer’s infant nutrition business as potential buyers prepare for the start of the sales process next month.

Photo By: Liz West

People familiar with the matter said that Mengniu was talking to UBS about a bid for Pfizer’s unit, which the pharmaceutical company said in July it would sell or spin off to its shareholders.

With $1.9 billion in revenues in 2010, the business could be worth as much as $10 billion, industry specialists said.

While Pfizer, advised by Morgan Stanley and Centerview, is expected to send out information to possible buyers next month, the process has moved more slowly than expected, the people said.

Pfizer has been grappling with whether to pursue a spin or split-off of the business to avoid a tax hit, an option that remains on the table.

Other bidders expected to participate in the sales process are Danone, advised by Lazard and JPMorgan; Nestlé, advised by Rothschild; and Mead Johnson, which is working with Goldman Sachs. Heinz may also be interested, people following the situation said.

Pfizer said that no decisions had been made and that it did not expect to make further announcements until next year. Other companies and banks declined to comment.

Some analysts argued that the deal would be too big for Mengniu and questioned the Chinese company’s interest in infant nutrition.

The Pfizer business has a significant position in the Chinese market, ranked number five in terms of market share in baby food.

Were Mengniu to bid for Pfizer’s business, it would represent a dramatic entrance to global dealmaking for the Chinese company.

While Mengniu considered bidding in the early stages of the sale of Yoplait this year, it decided not to proceed with an offer.

But the interest follows a string of scandals in China’s dairy industry.

An industry-wide investigation in 2008 found that many of China’s dairy companies had produced products tainted with the industrial chemical melamine, leading to several infant deaths.

Buying a respected international brand could help Mengniu build its infant nutrition business in a sector where Chinese names struggle to win trust from consumers.

Danone and Nestlé are considered the strongest candidates to buy Pfizer’s business, though both have areas of overlap that would be likely to necessitate asset sales.

Danone, for example, dominates the UK market for baby food and milk formula, where Pfizer is number two. Nestlé is the global leader in infant nutrition.

Mead Johnson, number one in infant nutrition in China, could encounter antitrust problems in buying the Pfizer business.

However, the company could spin off some assets as part of a deal, one person said, or would be well-placed to pick up assets should Danone or Nestlé need to sell them.

Euromonitor International forecasts that worldwide sales of baby food will grow at about 6 per cent a year to 2016.

Additional reporting Louise Lucas

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