LONDON Swiss food giant Nestle's deeper dive into healthcare by taking over the dermatology joint venture it had with L'Oreal suggests further deals in the space are likely.
The move underscores Nestle's determination to move beyond relatively stagnant traditional food markets into "wellness", where growth prospects and profit margins are more enticing.
"It is a major, major platform of growth for the future," Chief Executive Officer Paul Bulcke told analysts on Thursday following the release of the group's 2013 financial results. "It's the core of our strategy."
Nestle said this week it would sell an 8 percent stake in L'Oreal back to the French cosmetics company for cash and L'Oreal's half of Galderma, whose portfolio ranges from prescription drugs and injectable wrinkle treatments to over-the-counter products for skin, hair and nails.
The move, which extends Nestle's health interests and brings it into competition with some drug companies, is a long-term bet by Bulcke that he can take the group in a new and more profitable direction.
Like other global consumer goods companies, Nestle's growth slowed in 2013 as emerging market demand cooled and mature market consumers remain cost-conscious. It expects growth for 2014 to be below its long-term target as well.
In that landscape, Galderma could end up becoming a springboard for more acquisitions in the health field, though the cash could also fund deals in other areas.
"Clearly this area of skincare, and the medical area generally, could be another avenue that they look to do more bolt-on deals in, but don't forget the vast majority of their business is still core food and beverage," said Kevin Dryer, associate portfolio manager at Gabelli Funds, which owns Nestle shares.
He said General Mills could make sense for Nestle, given the two already have a joint venture selling cereal and the U.S. company has a growing portfolio of healthier foods such as Yoplait yogurt, organic tomato sauce and frozen vegetables.
Another target could be Danone's "medical nutrition" business, which sells liquid food for hospital patients unable to eat solids and food supplements for elderly people. The French company is considering a sale of that business, which could fetch more than 3 billion euros, though Nestle already controls 25 percent of the market, and so may not be able to buy Danone's entire business, sources told Reuters on Wednesday.
So-called medical foods, including those that may carry claims for improving cognitive function, don't face as stringent tests as medicines but still have much higher barriers to entry than normal food.
Nestle believes demand for such products will rise as aging populations require more special diets to deal with a range of ailments.
"M&A is part of our equations," Nestle's Bulcke said on Thursday, adding that the group was always looking at attractive bolt-on opportunities.
YOU ARE WHAT YOU EAT
So far, the focus of Nestle's health push has been on nutrition but the Galderma investment expands its interest into a broader healthcare field. However, analysts believe larger acquisitions will be needed.
"It's clear that they are going directionally into the health space but ... for them to get into this space a bit more meaningfully they probably need to do larger acquisitions, as they did when they were consolidating in baby food," said Navid Malik, analyst at Cenkos Securities.
Nestle bought Pfizer's baby food division for $11.9 billion in 2012 and the Gerber baby foods business from Novartis in 2007 for $5.5 billion.
"Healthcare obviously presents a premium price opportunity compared to normal foods, chocolate and bottled water, all of which are highly price competitive," Malik said.
Nestle could get into areas like omega-3 heart health, he suggested, where it would compete with a products like GlaxoSmithKline's drug Lovaza and Reckitt Benckiser's MegaRed krill oil supplement.
On the dermatology front, Nestle's latest bet may be a long-term threat to Botox-maker Allergan - and the Galderma deal also seems to torpedo rumours of a possible tie-up between Nestle or Galderma and the U.S. firm.
"This business did not have a lot of support from the parent company and now they'll be able to resource and invest appropriately," said Ronny Gal, analyst for Sanford Bernstein.
"Galderma's existing products are probably not a threat (to Allergan), but longer-term they will be competing to be the first to get competing products to market. Strategically, it is a threat to Allergan to have a competitor that is more focused and better resourced."
Nestle is not the only consumer company trying to diversify into "wellness" products. Rivals such as PepsiCo, Unilever and Campbell Soup are also adjusting their product portfolios to provide a healthier line-up but Bulcke believes his firm is pushing the boundaries further than rivals.
"It is about looking around the corner and seeing value coming," he said. "We see skin health coming up as one of the biggest growth drivers in that area."
Part of that reflects a recognition that Big Food is in the firing-line as a global obesity epidemic runs out of control - spurring calls for more regulation - but there is also a good business case for moving up the value chain.
Nestle sees itself increasingly as a science-driven company ready to catch the next wave in health trends - whether that is a novel food or skin product.
"There is a lot of evidence linking what you eat to how you look and potentially something might be commercialized and industrialized in the future - and that is what Nestle is keeping an eye on," said Kepler Cheuvreux analyst Jon Cox.
(Additional reporting by Silke Koltrowitz in Zurich and Ransdell Pierson in New York; Editing by Giles Elgood)