Tags: Nestle | NSRGY | PFE | DANOY

Nestlé Squirms as Swiss Franc Soars

By    |   Tuesday, 27 Sep 2011 11:42 AM

While global reserve currencies such as the dollar and the euro play havoc with financial markets, the Swiss franc has not only kept its value but has strengthened to record highs. For Swiss food giant Nestlé (NSRGY), the value of its home currency has created a conundrum.

On the one hand, the company has made it through the tough global economy to improve organic growth during the first half of 2011 by 7.5 percent on sales of $47.2 billion. Yet due to the franc’s strength, currency shifts will strip 19 percentage points off Nestlé’s full-year sales growth, according to an analyst at Nomura.

In an attempt to create value for the company, Nestlé undertook an aggressive stock buyback campaign, purchasing $11.4 billion worth of stock over the course of 14 months. That program came to an end in August after the company saw that its stock had lost 5.4 percent of its value during the same period.

The Swiss National Bank recently capped the currency’s growth, for the first time since 1978, after it reached a high of 1.0075 against the euro on Aug. 9. But that may not be enough. The cap is at 1.20 francs per euro, in an effort to stem the knock-on effects of franc appreciation on Swiss exporters such as Nestlé.

In an attempt to satisfy investor hunger in a time where there are few solid bets in the market, NSRGY will instead look to create value by taking its strong currency into the M&A market. Potential targets include Pfizer’s (PFE) baby formula unit, though there is talk that sale has been put on hold, as well as Mead Johnson Nutrition (MJN).

New markets

A buyout of Mead Johnson’s business, where sales are expected to be double Nestlé’s this year, would make Nestlé the largest baby formula name in the U.S. market. Doing so could potentially draw questions from antitrust authorities, but those flags haven’t been raised yet.

An added bonus would be to bolster Nestlé’s position in the Chinese market after a fake baby formula scandal there last year saw the company fall from grace. Adding Mead Johnson to Nestlé’s portfolio would put Nestlé above Danone (DANOY) into the top baby formula position in that country.

In addition to China, the Swiss food company is said to be in talks with Russian baby food producer Progress in a deal that could be valued at $345.2 million.

For the first time since 2002, Sanford C. Bernstein recently cut the stock to market-perform from outperform. Nestlé reports third quarter sales on Oct. 20.

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While global reserve currencies such as the dollar and the euro play havoc with financial markets, the Swiss franc has not only kept its value but has strengthened to record highs. For Swiss food giant Nestlé (NSRGY), the value of its home currency has created a...
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2011-42-27
Tuesday, 27 Sep 2011 11:42 AM
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