IPO Food for Thought

The recent IPO of Mead Johnson Nutrition (NYSE: MJN  ) has its share of interested observers -- from Bristol-Myers Squibb (NYSE: BMY  ) , which got extra cash from this partial spin-off, to IPO groupies thankful for the first initial public offering since mid-November.

The bosses at Pfizer (NYSE: PFE  ) should be equally interested observers; they can go to school on this IPO, so as to place a value on Wyeth's (NYSE: WYE  ) nutrition business.

I wasn't thrilled with Pfizer acquiring Wyeth, but if Pfizer completes the deal, it will likely shed some assets to help pay for the transaction and to keep focused on prescription drugs. Wyeth's nutrition business is a prime candidate because infant and child nutrition hasn't previously been part of Pfizer's strategic plan.

Wyeth's nutritionals has been a healthily growing division for the company. Last year, it produced $1.63 billion in revenue, all outside the United States, up 13% from 2007. Wyeth sells nutritionals in more than 100 countries.

Although this business accounted for 7% of Wyeth's 2008 revenue, it would represent only about 2% of the merged company's $71 billion revenue. This figure excludes potentially overlapping products and other businesses that will be divested due to antitrust issues.

Hold, spin, or sell
And it assumes that Pfizer will keep all of Wyeth. Don't bet on it, unless you believe Pfizer CEO Jeffrey Kindler is changing his strategic vision.

Pfizer could always try an IPO for Wyeth's nutrition business, either as a partial spin-off or a total spin-off. However, it would be creating an independent company with no U.S. operations.

A sale to a larger player seems more likely, especially in an industry dominated by a handful of food and drug giants. Other major players include Abbott (NYSE: ABT  ) , France's Groupe Danone, and Switzerland's Nestle (OTC BB: NSRGY.PK).

The absence of a U.S. presence for Wyeth's nutrition business removes a big anti-trust hurdle for potential buyers.

Peers and prospects
Could Mead Johnson handle the extra business? Last year, it produced $2.88 billion in sales -- up 12% from 2007. It operates in more than 50 countries, with roughly half of its sales coming from North America and Europe, and the other half from Latin America and Asia.

Abbott's nutritionals business -- $4.9 billion in sales last year -- is almost evenly split between the U.S. and foreign operations. Pediatric nutritionals accounted for 54% of sales in 2008, while adult nutritionals contributed 46%.

Nestle has been bulking up by acquiring the Gerber baby food business from Novartis (NYSE: NVS  ) in September 2007 as well as Novartis's own medical nutrition business in July 2007. Infant formula accounted for about $2.7 billion in revenue in 2008 on an annualized basis.

Groupe Danone's nutrition business is a bit difficult to gauge. Last year, "baby nutrition," which includes both food and infant formula, produced about $3.5 billion in revenue. Medical nutrition for the elderly and infirm contributed about $1.1 billion.

After it buys Wyeth, Pfizer must decide if it wants to buy a bigger piece of the worldwide infant-and-child nutrition market, a business that the Euromonitor research firm says had roughly $19 billion in sales during 2007. I say selling this Wyeth unit would be the best financial formula for Pfizer.

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Fool contributor Robert Steyer doesn't own shares in any companies mentioned in this article. Pfizer is a Motley Fool Inside Value and a Motley Fool Income Investor selection. The Motley Fool owns shares of Pfizer and has a full disclosure policy.


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