The baton hasn't changed hands yet, but we may soon be seeing the birth of a new 800-pound gorilla in the diet space. On Monday morning, Swiss food giant Nestle announced that it has agreed to purchase Jenny Craig from its private equity owners for about $600 million. That'll be a nice reward for the people who purchased the company for $115 million back in 2002, when it was suffering in the wake of management missteps.
In Jenny Craig, Nestle is buying both a diet company with more than 600 centers in the U.S., Canada, Australia, and New Zealand, and a company with a line of branded diet-food products. Given Nestle's recent $670 million purchase of an Australian maker of nutritious snacks, Uncle Toby's, it's clear that the company is committed to building up the health and fitness side of its nutrition business.
For now, at least, Weight Watchers (NYSE:WTW) remains the clear market leader in meeting-based weight-loss programs. Weight Watchers' $4 billion-plus market cap dwarfs the Jenny Craig purchase price, as does its trailing revenue of more than $1 billion. But even so, Weight Watchers has not been a top performer lately, and Nestle's supervision just might allow Jenny Craig to continue its double-digit revenue growth long enough to really chew in to Weight Watchers' business.
Then again, I don't believe that Nestle necessarily looks at Weight Watchers as its main rival. When you consider that other rival food giants, such as Unilever (NYSE:UL) and ConAgra (NYSE:CAG), have their own diet-food brands -- Slim-Fast and Healthy Choice, respectively -- competing better with them could be the real goal.
A risk does exist that Nestle will screw up the diet-center business to the detriment of the packaged-food business. After all, few companies can manage to really do one thing right, so the idea that a company will add a completely different business model and succeed with it can be a bit of a stretch. On the other hand, Nestle is keeping the current Jenny Craig management in place, so as long as Nestle steps back and lets good managers do their work, this can work out all right.
In the meantime, Nestle appears to be worth consideration if you're an investor looking for a defensive name. But those wishing for an easier investment option -- Pink Sheets stocks aren't for everyone, after all -- might also want to consider Unilever.
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Fool contributor Stephen Simpson but has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
