M&A rumors rife for Nestle

International merger and acquisition fever is back, according to Euromonitor International. Following Kraft's purchase of Cadbury in January, potential rumors have been swirling across the global food industry.


Nestlé's longstanding position at the top of the global packaged food market has been usurped by Kraft Foods through its acquisition of Cadbury. In this changed competitive landscape, Nestlé, flush with cash, faces new challenges to expand further. Euromonitor presents some acquisition scenarios for Nestle, which could further reshape the competitive landscape of the global packaged food market.


General Mills is a good fit category-wise but not geographically, according to the analysis. With revenues for its 2009 fiscal year reaching almost $4.7 billion, a General Mills acquisition would give Nestlé strong brands, such as Cheerios cereal in North America, Yoplait yogurt and Progresso soups. As the two companies' portfolios are largely complementary, competition issues would not be major obstacles in key markets. On the downside would be the increased exposure of Nestlé to the mature U.S. market, as opposed to its current, more balanced geographic market coverage. General Mills' strong exposure to the North American market, in particular the U.S. is a major weakness, with its mature domestic market set to witness very little in the way of growth in the short term, its presence in the emerging world is relatively minor, and it is noticeable that the company has been slower than most to address this shortcoming.


Heinz's geographic and category positioning does not fit with Nestlé. Heinz would offer good synergies with two of Nestlé's core operations - sauces, dressings and condiments and baby food - and could follow a similar strategy to its recently enhanced frozen food operations to enlarge economies of scale in its core divisions. However, Heinz's current baby food operations are very European focused, mainly in Italy and the UK, and small scale. Sauces, dressings and condiments currently account for about 5 percent of Nestlé's packaged food retail sales, but the category is one of the slowest growing in the overall packaged food market. Therefore, it is not likely that Nestlé would aim to expand in this category on a global scale with a high level of investment.


Hershey would enhance Nestlé's confectionery position. Nestlé's weakest regional confectionery market is North America, where it commands a value share of just 4 percent. A Nestlé/Hershey union has been anticipated in the past, and with over 80 percent of Hershey's sales still generated in the U.S., it could still fulfil Nestlé's criteria of a geographic-specific acquisition. However, like the General Mills scenario, Nestlé's exposure to slow growing regions would increase. In addition, the Nestlé/Hershey entity would consist predominantly of chocolate products, and it would remain weak in the more dynamic areas of gum and functional/medicated sugar confectionery. With Hershey's strong reliance on the mature North American market, Nestlé's exposure to a slow growing region would increase. Category-wise the Nestlé/Hershey union would also go against Nestlé's highly publicised wellness strategy. In addition, given Hershey's trust-owned legal status, a Cadbury-like hostile takeover is not a possibility.