The Banking and Strategy Initiative

Chillin' out till it needs to be funded

Is it Novartis? Is it Kraft? Just the cheese.

It’s not even about Cadbury’s anymore

And I am not wondering about the title, just who is the bigger offender in this new twist

Nestle: $NSRGY                      Kraft: $KFT                     Novartis: $NVS                 Cadbury: $CBY

The fat lady sings for Kraft bid

It’s true. It is a theater of the bizarre. The Deal theater and the Lifestyle Economy has seemingly done itself in an all economic no brand purview exercise by Nestle. Nestle has moved from unnatural extensions of the foods and dining business by selling a piece of its European Business Alcon to get GBP24.4bn from Novartis ( For more impact on Novartis’s OTC business from Novartis moves in the late aughties check our Social Causes and Consumerism trial)

Not many people including industry analysts would know or care about Nestle’s Pharma business, which is likely to be a big deal for Novartis which used to do a silly $13 billion 2007 and losing it fast against the Swiss Franc movement and the expiring molecules.  The frozen powders business is probably still with Nestle. Nestle however had sold another 25% earlier in July for $10.8 billion and these options have netted them bigger bounty for the remaining 52%. With Nestle spending another $11 billion for the open offer Alcon will add to the OPM of the starved Novartis WidgetsAlcon is the world leader in eye care but for a valuation of $60 billion firstly seems phenomenal for the added annual revenues of $6 billion which will barely bring back Novartis to 2007 revenues. This valuation is based on its share price in the NYSE at $165 at Year End and brought Novartis back a full dollar to 56 Swiss Francs in Zürich yesterday.

Secondly, the deal has enhanced new fears of market failure with the deal being financed from 205 million Novartis shares ( New issue of 98 million)

However, as I said, the pharma deals are a little complex to handle here for the general reader and one can venture on to the Health and Pharma blog for more details on that part – in short summary, Novartis is definitely going down…and one suspects there could be some more revelations that its board has been purview to for such cataclysmic sudden death attempts for a ‘gamechanger’

In as far as this is just that Gaul Asterix on the rampage, I may be wrong.

Come back to the foods & confectionary players of Western Europe and Swiss. Nestle is thus fattening its net worth and using the cash, but then what Nestle is buying is an equally unlikely concoction like its water business, that doesn’t make sense to its central tale. It is using the large cash to buy Kraft’s frozen pizza business which can at the very least be compared to the Folgers’ sale by P&G on the flip side. The bill of $3.7 billion was easy and leaves a lot of FX speculators with fun as the US purchase of frozen pizza adds a new dimension for analysis of where Nestle could ever head in its form and manner in the next decade.

Frozen Pizza, Powdered Milk and Chocolate. I can see significant gaps in their food foray and thus their similarity of business to their competitor Unilever takes shape. Both Nestle and Unilever are head to head in the foods business for the large hole in their food offering. They would probably be explaining to us what way the Food consumption pie is headed more publicly in the next few months. ( Funnily, in the whole of the oughties, neither Nestle nor Unilever have headed anywhere significantly esp. in the foods business.

Cheese with swiss flag

Also listen to Nestle when they start talking about supply economies and the Food Supply Chain ( ground Logistics, 3PL, more) in 2010 and beyond. The Swiss do try some strange stuff and this may be just about getting cozy with the other bed mates in Confectionary (Kraft) without buying any of these probably ‘risky’ transactions themselves. They are going to be funding Kraft for extra Cash to see where Cadbury goes from here. And I thought the Gauls are crazy. It;s the cheese, nonetheless. La Kasse’ – Swiss Franc profits grew >100% in 5 years – act. 80% in just this one year . The seeming muddle in Nestle is turning them into a high yielding supercharged strain of winning DNA. The seeming muddle in Nestle is turning them into a high yielding supercharged strain of winners and thus I believe the story after bankrolling Kraft would still remain Nestle. They aren’t doing badly in the super markets in India and Asia either. It’s return on Equity is a whopping 37.5% and even after the sale, the same will keep Nestle supercharged. It also produces more than CHF 8 billion in Cash ( from 2009 report at BW) and with the new found attempts at dollar parity along with the roaring Aussies that means $28 billion and $8 billion in Cash, $4 billion ‘seemingly just loaned’ ( I am just being old school stubborn, the dealmaker may not win much more otherwise) to Kraft for California Pizza Kitchen and InGiorno which may even come back after the experiment in a new business, leaving Kraft free to mull an equivalent miniscule titillation for hot growing Cadbury. Doesn’t help Kraft much does it!

Here’s The Advantage zyaada position on Cadbury again: Of the $2.7 billion sales in HY2009 (details here) over 40% is from growth markets and there sales growth would be easily in excess of 30%, with double digit margins, that have kept CBY’s 2008 net margins at 13% Thus the premium from the cost savings would just be GBP 736 million ($1.2 billion) , while the sales premium would be the additional 12% annual sales ( even if you assume the same for only 3-4 years, it amounts to another $2.4 billion from my estimates and so the price premium can easily cross 700 pence taking the price to well above 1260 pence.

This is of course rough estimates, but it is definitely worth someone like KKR to come in and keep the right management on top.

The Cadbury Balance sheet is entirely made of cash retained earnings making 99% of the Equity of $3 billion and it’s sales of $5.5 billion each year. There is no operating interest cost in its income statements.

As you can see, Cadbury is the superbrand that stayed behind with an Alcon ringing in the cash registers..but chocolate is more Nestle’s, just getting cozy with Kraft along with its Supply chain combo with Mars


%d bloggers like this: