Z U R I C H, Jan. 16, 2001 -- Swiss food group Nestle SA has agreed to buy Ralston Purina Co in a $10.3 billion deal,turning one of its fastest growing businesses into the world'slargest pet-food company.
Nestle is offering $33.50 in cash per share for theoutstanding shares in Ralston, a 36 percent premium to theclosing price for Ralston on Friday, January 12 and valuing theU.S. firm's total equity at $10 billion.
Nestle will also assume $1.2 billion in debt but will gain$0.9 billion from Ralston's financial investments.
The Swiss company, whose existing brands in the over $25billion a year pet-food market include Friskies cat food andMighty Dog, has seen the business become one of its fastestgrowing areas since its entry into the market in 1985.
$6.3 Billion in Pet Food Sales
With the acquisition its pet-food sales will reach $6.3billion, putting it ahead of the previous market leader,privately held Mars Inc., which had sales last year of $5.85billion.
"It's a really good thing for Nestle. Ralston is secondworldwide in pet food sales, behind Mars," said analyst AmandaHopkins at fund managers Union Bancaire Privee in Geneva."Pet-food sales are growing by about 6.5 per cent annually,about double that for human food."
Nestle shares were 1.9 percent higher at 3,539 Swiss francsat 0924 GMT. The share has outperformed the SMI blue-chip indexby 7.50 percent in the past year.
Nestle said the merger would be cash accretive to earningsper share at the end of the first year and lead to cost savingsof $260 million annually by 2003.
It expected a positive influence of top line growth andprofitability in the years to come.
Debt vs. Dollars
Sources in London said Nestle would finance the equity partof the deal with $7 billion in debt and $3 billion from its owncash.
"The amount of this transaction does not surpass thefinancial facilities of the group," said Nestle spokesmanFrancois-Xavier Perroud.
He said the company had a large cash facility, planned toarrange a rolling finance facility with banks and could alsosell so-called Treasury stock — Nestle shares the company ownsitself.
Asked about dollar funding, Perroud said: "It is clear thatthe rolling financing facility will not be taken up with banksin Switzerland but in dollars."
Ironing Out the Details
Details still needed to be worked out, though he said themerger was expected to be concluded before the end of thecalendar year, subject to regulatory and shareholder approval.
Nestle had 8.7 billion Swiss francs ($5.3 billion) in cashand other liquid assets at the end of June, and generatedoperating cash flow of 3.2 billion in the first half of 2000.
Rene Weber, analyst at investment bank and fund managersVontobel, said the price was high but justified.
"They are acquiring a market leader with good margins andgrowth potential," he said, adding the price/earnings multiple of24 times as in line and even lower than some recent foodindustry deal which saw multiples of 26 to 28.
Weber said there was some $9.5 billion in goodwill, whichNestle will write down over 20 years. This would depress netprofit but the deal was cash positive on earnings from year one.
The single biggest shareholder in Nestle is the Bettencourtfamily with three percent. UBS Brinson, the largestinstitutional owner with 1.12 percent, had no immediate comment.
Chowing Down in the U.S. Market
Ralston Purina, with its Purina Dog Chow brand, had NorthAmerican sales of more than $2.25 billion in 2000 andinternational sales — in Latin America and Europe — of some$450 million.
Nestle said Ralston's earnings before interest, tax,depreciation and amortization (EBITDA) for the year to September30 were $657 million, or 23.8 percent of sales. This means thebid value is a multiple of 15.7 times the EBITDA.
"This merger is not only in line with the long-termstrategic approach of Nestle, but the complementary strengths ofNestle and Ralston Purina will accelerate both the growth andthe performance of the Nestle group," Nestle Chairman Rainer Gutsaid in a statement.
Ralston Purina chairman William Stiritz said the merger was"a great deal for our shareholders and our company."
The U.S. Friskies business will be merged with RalstonPurina into Nestle Purina Pet Care, based in Saint Louis andheaded by Patrick McGinnis of Ralston Purina. Elsewhere theactivities will be integrated into Nestle's businesses.
Wasserstein Perella acted as financial advisor to RalstonPurina while Nestle was advised by Credit Suisse First Bostonand Greenhill & Co.