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Stock Analyst Update

Just a First Step for Nestle

The wide-moat firm's sale of its U.S. confectionary business is part of a larger plan of portfolio repositioning.

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Although  Nestle's (NSRGY) disposal of its U.S. confectionery business to Ferrero for $2.8 billion in cash represents decent value for its shareholders, the deal does not impact our CHF 79 valuation. We view this deal as one of the first steps in a strategy to position the company in categories that will deliver higher long-term returns on capital. We are reiterating our wide moat rating because this deal does not change Nestle's highly entrenched position in its supply chain due to its broad portfolio and its brand leadership in several categories, and we regard the shares as being roughly fairly valued.

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.

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Philip Gorham does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.