Novartis Confirms $5.5 Billion Gerber Sale to Nestle

Nestle, the world's largest food company, will buy U.S. baby-food giant Gerber from Novartis
AG for $5.5 billion in cash, becoming the world's biggest baby food company.

Nestle said on Thursday the cash transaction would give its nutrition division -- which includes infant formula, baby food, medical nutrition and weight management -- annual sales of about
10 billion Swiss francs ($8.21 billion).

Gerber, which has been making strained peas and carrots since 1928, is expected to generate an estimated $1.95 billion in sales in 2007 and will improve Nestle's operating profit margin immediately, the Swiss-based company said.

Nestle, already the world's biggest maker of infant formula, now moves into the top position in baby food as well through the Gerber buy. Nestle said it aimed to expand Gerber operations

"This is like an iceberg where you only see the tip of it," Richard Laube, head of the nutrition division, said in a conference call.

Nestle's has lacked a baby food brand in the United States and has been eager to buy Gerber for more than a decade.

Nestle recently bought Swiss-based Novartis's medical nutrition business for $2.5 billion as it moves its earnings focus away from mass items like bottled milk to high-margin products like made-to-order diet plans and hospital food.

Novartis Transformation

Novartis, the world's fourth-biggest pharmaceuticals company, said it planned to complete the Gerber sale in the second half of 2007, marking the end of its transition to a group focused 100% on healthcare.

After the sale Novartis, which makes drugs such as Diovan for hypertension and Glivec for leukaemia, will generate all its revenue from healthcare as compared to 1996 when the segment accounted for 45% of its revenue.

Nestle, the maker of Nescafe coffee, KitKat chocolate bars and Perrier water, first tried to buy Gerber in the early 1990s, but lost out to Sandoz, which later became part of Novartis.

Shares in Novartis were near flat at 67.10 Swiss francs, while Nestle shares were down 0.2% at 488.75 francs.

Analysts at Vontobel called the deal a "perfect fit" for Nestle and reiterated its "sector outperform" rating.

"Nestle currently only holds fourth place in infant/baby foods in the U.S., so this will secure a clear leadership position," Vontobel said.

Nestle said on its website that the deal would be neutral for underlying earnings per share (EPS) in the first full year after the purchase and accretive in the second full year.

In addition, Nestle said it expected cost synergies of $95 million by 2011, after around $70 million in integration costs for severance and relocation pay.