Nestlé Investors Can Swallow This Herbal Growth Remedy: Gadfly
Mark Schneider, the newish chief executive officer of Nestle, has wasted no time reshaping the fusty food group.
On Tuesday, the company announced its $2.3 billion purchase of Atrium Innovations, a maker of organic and natural supplements, from an investor group led by Permira Funds. The terms look a bit pricey.
Schneider has done quite a bit of M&A in his short time at the company, and that can be a warning sign for investors. But at least the modest size of this deal, and his willingness to stick close to Nestle's existing operations, should prevent investors being left with a bad taste in their mouths from swallowing this supposedly health-inducing medicine.
This is straight out of the playbook for chasing the millennial dollar, as the big consumer groups try to eke out growth in stagnant markets.
Buying Atrium gives Nestle access to supplements such as probiotics, plant-based proteins and meal replacements, as well as multivitamins, increasingly in demand as consumers seek to safeguard their health and reject mainstream brands.
That's in line with the strategic blueprint that Schneider set out at the end of September. There, he pledged to look for opportunities in consumer healthcare - read more-profitable nutritional supplements rather than low-margin vitamins - to augment the company's core areas of coffee, pet care, infant formula and bottled water.
But like other consumer goods groups who have bought their way into the latest fad, it has had to pay up.
The price is 3.3 times Atrium's 2017 sales of $700 million. That is less than the 4.76 times that Reckitt Benckiser Group paid for Mead Johnson, but just above the 3 times that Danone paid for WhiteWave, according to Bloomberg data.
Still, Nestle can afford it. Net debt at the end of this year is expected to be less than earnings before interest, tax, depreciation and amortization.
Even after a planned $21 billion stock buyback, the net debt to Ebitda ratio will only rise to 1.5 times in 2020 - and that's before any potential disposals. Then there's Nestle SA's stake in L'Oreal SA. That alone is worth about $28 billion.
So buying Atrium doesn't preclude further purchases. If Nestle still wanted to pursue Hain Celestial Group - something Bloomberg News said recently it was considering - it could.
Schneider has a reputation as a deal junkie and the purchases in his first year in the job certainly live up to that. As well as Atrium he's picked up a smaller artisan coffee group and niche food businesses.
That leaves investors with a nervous disposition. At least this herbal remedy should calm this a little. It's of a manageable size and is close enough to Nestle's core areas to prevent too many side effects.