Nestlé SA’s Active M&A Consistent with “A+” Rating, Fitch Says

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Fitch Ratings announced this week that Nestlé SA’s “intensified” M&A activity in 2020 confirms, in the credit rating agency’s opinion, that proceeds from asset divestments will be redeployed for “bolt-on” M&A, not debt repayment.

Bolt-on acquisition refers to the purchase of smaller companies, usually in the same space that present strategic value.

Along with share repurchases under a $ 21.95 billion program, Fitch says it anticipates that the company’s M&A spending to push leverage higher – towards levels in line with Nestlé’s “A+” rating.

Fitch indicated these expectations in the downgrade from “AA-“ in October 2019.

Acquisition of the Rest of Aimmune Therapeutics

On August 31. 2020, Nestlé announced it would acquire the remaining 74% stake in allergy treatment producer Aimmune Therapeutics, Inc. for a total enterprise value of $2.6 billion. This major deal signals a rebound in M&A activity in the sector in the third quarter of 2020 after activity slowed in the second as the coronavirus pandemic created an extremely uncertain operating environment and challenges in the supply chain and the food service channel.

However, the packaged food sector is one of the sectors least affected by the pandemic, and Nestlé has evidenced that fact by growing its sales organically by 2.8% in the first half of 2020.

The acquisition of Aimmune will add to the $1.76 billion already spent on acquisitions in the first half of 2020, which in turn will contribute to total spending in 2020 being substantially higher than the $.77 billion Nestlé spent last year. In a large deal in January 2020, Nestlé acquired gastrointestinal medication Zenpep. Both deals complement Nestlé Health Science’s operations. That division is focused on nutritional science products and representing, along with food and beverages, Nestlé’s core business.

Fitch reports that Nestlé has been rebalancing its portfolio by shifting away from low-growth operations and those that are no longer strategic. Nestlé’s increase in M&A comes after a round of asset disposals, including Nestlé Skin Health and Nestlé’s US ice cream operations in 2019-2020. That total on those two was around $15.3 billion.

Fitch says it expects the strategic review of parts of Nestlé’s water business in North America and of Yinlu Foods Group’s peanut milk and canned rice porridge businesses in China to result in the sale of these operations in 2021 [see below]. Its rating case assumes that disposal proceeds will be used to fund $8.23 billion of M&A over the next three years in the acquisition of businesses that should help Nestlé increase its organic sales growth to 4%-6% from 3.5% in 2019.

Nestlé’s “A+” rating indicates Fitch’s expectation that its funds from operations net leverage will increase towards 2½ times over the next three years from a more conservative 1.7 times in 2019. The credit agency anticipates that this will happen as Nestlé completes its $21.95 billion share buyback program and rebalances its portfolio through bolt-on M&A and divestments.

Simultaneously, business repositioning towards higher-growth products and geographies will further bolster its Nestlé’s business profile, Fitch says, which it thinks is in line with the “AA” rating category.

Nestlé Looks to Offload its U.S. and Canadian Bottled Water Operations

Nestlé says it would like to sell most of its bottled water operations in the U.S. and Canada. That business accounts for a significant share of the Swiss food titan’s sales. However, it has also drawn rebukes from environmental groups.

The company generated revenue last year of $3.6 billion from American water brands it owns and from delivering purified water to homes and businesses. That number doesn’t include higher-priced import brands like Perrier, S. Pellegrino, and Acqua Panna, which are more profitable and which Nestlé wants to retain.

Nestlé, the world’s largest food company, has been criticized from groups that say it drains natural water supplies to bottle and sell at a profit. Environmental activists contend that bottled water is inherently wasteful—certainly in countries with drinkable tap water— because of the energy needed to get it to stores. Bottled water also contributes to the global excess of plastic waste.

With corporations under heavy pressure to help fight climate change, Mark Schneider, Nestlé’s CEO, has been trying to demonstrate that the company can be both sustainable and profitable.

The company, whose brands of baby formula, ice cream, chocolate, pet food, and coffee are ubiquitous throughout the world, has been moving into plant-based meat substitutes, pleading to reduce sugar and fat content in its products, and trying to make all of its packaging recyclable by 2025.

Nestlé recently announced that, also by 2025, it will replenish all of the water it draws from watersheds while taking measures to mitigate the carbon dioxide produced by bottled water production and transport.

During an interview with The New York Times, Schneider said Nestlé had decided to consider exiting the U.S. water brands primarily due to the fact that they weren’t selling up to company expectations. He said that American consumers are less willing to pay for bottled water than Europeans. Schneider also remarked:

The creation of a more focused business enables us to more aggressively pursue emerging consumer trends, such as functional water, while doubling down on our sustainability agenda. This strategy offers the best opportunity for long-term profitable growth in the category, while appealing to environmentally and health-conscious consumers. Nestlé is one of the pioneers in the global water business and remains committed to healthy hydration. We are working tirelessly to ensure that consumers can enjoy our beverages in an environmentally responsible way.

The NestléWaters business in North America—not including International brands—enjoyed sales of roughly $3.73 billion in 2019. Aside from the retained International brands, it includes popular regional U.S. spring water brands such as Poland Spring® Brand 100% Natural Spring Water, Deer Park® Brand 100% Natural Spring Water, Ozarka® Brand 100% Natural Spring Water, Ice Mountain® Brand 100% Natural Spring Water, Zephyrhills® Brand 100% Natural Spring Water, and Arrowhead® Brand Mountain Spring Water.

It also encompasses the direct-to-consumer and office beverage delivery service ReadyRefresh® by Nestlé®, and the Nestlé® Pure Life® brand.

Nestlé says that it “remains fully committed” to growing its iconic International brands in the U.S. and globally, which include Perrier, S.Pellegrino and Acqua Panna. The company also plans to further build its premium mineral water brands around the world and invest in differentiated products under the NestléPure Life brand, such as functional water with health-enhancing ingredients.

Nestlé’s global Waters sales tallied $8.56 billion in 2019. The portfolio encompasses 48 water brands and one tea brand on five continents, including international brands such as Perrier, S.Pellegrino, and Acqua Panna, along with regional premium brands like Erikli® in Turkey, Sohat® in Lebanon, and Buxton® in the United Kingdom.