FOOL PLATE SPECIAL
Switzerland's Nestle is better known for its giant chocolate operation, but today's acquisition will make it the top dog in pet food, unseating Mars. With the pet-food industry a large, growing, and relatively secure business, the $10.3 billion deal seems to make plenty of strategic sense.
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You might want to hand this Fool Plate Special right to the dog. Shares of pet-food giant Ralston Purina (NYSE: RAL) jumped this morning on news that global comestibles leader Nestle, a Swiss company, agreed to buy the company for $33.50 per share in cash. The $10.3 billion deal represents a 36% premium over Friday's close. "This merger is not only in line with the long-term strategic approach of Nestle," said Nestle Chairman Rainer Gut, "but the complementary strengths of Nestle and Ralston Purina will accelerate both the growth and the performance of the Nestle Group." Nestle became a major pet-food player in 1985 when, through its acquisition of Carnation, it took over stewardship of the Friskies brand. Subsequent purchases of Alpo, Spillers, and Cargill Argentina helped build the business into a $3.7 billion revenue generator. The company will add another $2.7 billion in sales -- $2.25 billion from the U.S. -- by picking up Ralston Purina. That makes it the world's top pet-food producer, overtaking family-owned Mars Inc., another company perhaps better known for its chocolate than its kibbles. "With over 12% of its business in this fast growing sector," reads a press release, "Nestle expects a positive influence on its top line growth and on its profitability in the years to come." The reasoning behind the deal should sound familiar to anyone who's followed the flood of supermarket products mergers over the last several years. (For more on the consumer food and beverage biz, check out Industry Focus 2001.) The companies hope to combine marketing muscle, present a full line of powerfully branded products, trim expenses ranging from distribution to product development and beyond -- as much as $260 million is expected annually -- and dominate "shelf space" by gaining influence with retailers. But with Nestle now seeing its role as the world's top food maker challenged by Philip Morris' (NYSE: MO) own acquisitive subsidiary, Kraft, why did it turn to a multibillion-dollar pet-food deal? Simply put, it believes in the growth opportunities afforded by the decidedly unglamorous sector -- and, as Bill Mann pointed out in his November column "Economics of Dog Food," there's solid reasoning there. Ralston Purina must have become more attractive to Nestle last year when it spun off Energizer (NYSE: ENR). (Ralston still owns stakes in Conoco (NYSE: COC.A), Interstate Bakeries (NYSE: IBC), and DuPont (NYSE: DD), which may be sold.) The pet-food business operates in a sector considered ripe for more than $30 billion in annual sales and growing at 6.5%, a Swiss analyst told Reuters, about twice as fast as the "people food" business. Add in a healthy cushion from ill economic effects -- few folks have the heart to short-change their dog, even in tough times -- and there are plenty of positives lying in the big bags on the bottom shelf. The companies expect the deal, subject to the approval of regulators and Ralston Purina shareholders, to close by the end of the calendar year. Assuming it does, investors need to move their attentions behind the seemingly logical strategic sense of the deal to thoughts of the valuation paid relative to the returns generated, along with the companies' progress in integrating the two operations.
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