* Nestle ahead in race for Pfizer's infant nutrition unit
* Pfizer's business valued at $10 billion by analysts
* Danone expected to be Nestle's biggest rival for deal
* Chinese market seen as biggest prize for winner
* Anti-trust a concern but not insurmountable
By David Jones
LONDON, Feb 7 (Reuters) - Swiss food group Nestle is in pole position to buy Pfizer's $10 billion Wyeth infant nutrition business in a two-horse race with French rival Danone and so boost its fast-growing Chinese business.
The two European groups have emerged as clear frontrunners in the auction after first-round bids were submitted before Christmas, while U.S. groups Mead Johnson and Heinz are also involved in the second round.
"Assets as good as this do not come along very often. Nestle has deeper pockets than Danone and we would not expect them to give up on this deal. It is Nestle's deal to lose," said one banker working on the auction.
The Pfizer unit is an attractive $2.1 billion turnover business growing at 8 percent a year and based around its top SMA Gold brand. Some 60 percent of sales are in Asia, 30 percent in Europe, largely Britain, and 10 percent in Latin America.
It ranks number five globally in the infant milk formula market - the world's fastest growing packaged food category - after Nestle, Mead Johnson, Danone and Abbott Laboratories .
"The key strategic attraction in our view is Pfizer's position within the $6 billion Chinese infant formula market... The market is unusual in having super-charged Chinese growth rates as well as highly attractive margins," said analyst Robert Dickinson at brokers Citi.
China's infant formula market is set to double in size to $16 billion by 2016, having grown at more than 20 percent over the last five years to feed 16 million new births a year.
Pfizer's business has a quarter of its sales in China.
Nestle, the world's biggest food group and infant formula maker, has a relatively small presence in this Chinese market but could leap to No. 3 nationally with the Pfizer unit buy.
Market leader in China, Mead Johnson, saw its national sales jump 40 percent in 2011, led by its top Enfamil brand. International brands gained from a 2008 milk tainting scandal that damaged the reputation of domestic companies.
At least six children died and nearly 300,000 children fell ill from drinking powdered milk laced with melamine, an industrial compound added to fool inspectors by giving misleadingly high results in protein tests.
A deal for the Pfizer unit is well within Nestle's scope, with its low debts and AAA credit rating, and it could easily outbid Danone in a bidding war. The Swiss group has said it is looking for deals after cancelling a share buyback programme.
The purchase would stretch the smaller Paris-based Danone financially and may force it to sell off assets to mount a bid.
Credit Suisse analyst Robert Moskow values the unit at $10 billion or 17.8 times its historic EBITDA profit. This compares to similar infant nutrition deals in 2007 when Nestle bought Gerber at 15.7 times and Danone purchased Numico for 22 times.
A deal is some way off in the auction process and completion is expected to be delayed until the summer for tax reasons.
Both European companies would face anti-trust hurdles. Nestle, whose main formula brand is NAN, is likely to have to sell 25 percent of Pfizer's unit sales by disposing of interests in Latin America, Australia and South Africa. Danone, which sells Dumex as well as Milupa and Bledina brands, might have to sell 30 percent of Pfizer's sales including Britain and Ireland.
Analysts say the situation in China is less clear. Danone's 14 percent share in second place plus Pfizer's 8 percent share in fifth would overtake leader Mead Johnson's 16 percent. Nestle has a relatively small 4 percent share of that market.
Analysts say Heinz is unlikely to bid for the whole Pfizer business but could be interesting in portions Nestle and Danone would not be able to buy, while Mead Johnson is seen focusing on its organic growth strategy and would be concerned that adding Pfizer's Chinese business might cause anti-trust problems.
Nestle and Danone have been tight lipped over the issue, declining even to acknowledge they are in the auction process.
The world's biggest drugmaker Pfizer put its Wyeth infant nutritional business up for sale along with its animal health unit last July. The former business was acquired through Pfizer's $68 billion purchase of Wyeth in 2009.
A potential deal may trigger a tax bill as Pfizer would have to pay capital gains on any increase in the value of the asset so soon after its Wyeth takeover, and Pfizer has asked bidders for structures on how the they would deal with tax issues. If none of those are credible then the process may go no further.
Pfizer chief executive Ian Read said any separation of its infant nutrition and also its animal health businesses would occur between July 2012 and July 2013.
The auction is being run out of New York with Morgan Stanley and Centerview Partners advising Pfizer. The first round of bidding saw at least four, namely Nestle, Danone, Mead Johnson and Heinz all registering interest and going forward in the current second round.