Just a First Step for Nestle

Although

The price realized of $2.8 billion is above our previously-stated estimate of $2.4 billion, which we believe reflects a fairly competitive bidding process. Several media outlets reported that both Hershey and Mondelez were also interested in the assets. Data from Pitchbook shows that acquisition valuations in the confectionery industry of companies with at least $10 million in EBITDA have averaged 17.5 times EBITDA since the beginning of 2015. Assuming a 16% EBITDA margin, as we did in our initial valuation assessment, we estimate the EBITDA multiple to have been 20.6 times for this deal, a rich price when considering RB last year sold its higher margin food business at a similar multiple.

In recent weeks, Nestle has stepped up its execution of its portfolio repositioning. Last week, it announced it intends to sell the Australian chocolate bar Violet Crumble, and has entered the vitamins, minerals and supplements, or VMS, category, after acquiring Atrium Innovations in December. It may also bid for the VMS business of Merck. While the shift to health and wellness is likely to be positive for growth, we note that the VMS category is no less competitive than confectionery, and the size of these deals suggests change will be evolutionary rather than revolutionary.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.