LONDON (Reuters) - Nestle NESN.VX will battle a Danone-Mead Johnson (DANO.PA) MJN.N team for Pfizer's (PFE.N) $10 billion infant nutrition business next week, with the Swiss giant tipped as favorite, people familiar with the situation said on Friday.
The Pfizer unit being sold is a high-growth $2.1 billion turnover business with over 70 percent of sales in emerging markets and a key position in China, and has attracted the attention of the three largest players in the infant milk formula sector.
Nestle, the world's largest food group, is seen by many bankers as favorite due to its size and deep pockets, but it faces stiff competition from the French-American combine, which was brought together to overcome antitrust concerns.
"A Danone-Mead combination looks a strong team, but we still see Nestle ahead, and it may be favored by Pfizer as a single party bidder," said one person close to the situation.
Second-round bids are due on March 5 in a process started last July when the world's biggest drugs group put the business up for sale along with its animal health unit following its $68 billion purchase of Wyeth in 2009.
The Pfizer business ranks as world number five in the infant milk formula market after Nestle, Mead Johnson, Danone and Abbott Laboratories (ABT.N), with over a quarter of its sales in China, where the $6 billion market is expected to double by 2016.
Both Nestle and Danone face antitrust problems and this was why the French group linked up with Mead Johnson, with analysts estimating the U.S. group could pick up Pfizer's businesses in the UK, Australia and Saudi Arabia in a joint Danone bid.
"Danone has solved the antitrust dilemma by getting together with Mead, and Nestle still has to deal with all that. The stakes are high for Danone; if Nestle wins the asset then Danone faces more robust competition from a much bigger competitor," said another person close to the process.
Analyst Michael Steib at Morgan Stanley says Nestle may have to dispose of assets in Latin America, the Middle East and Africa -- up to 38 percent of Pfizer's nutrition sales, but this number could be much smaller depending on how narrowly local antitrust authorities view such a potential combination.
"We think consolidation in this industry makes sense, that Nestle should take part, provided it can gain control of assets at a reasonable price, and we think the majority of shareholders would support Nestle if it chose to get involved," he said.
The big prize for Nestle would be to become the largest player in the Asia Pacific market, and move to third from ninth in the Chinese market just behind Mead and Danone. It is planning its own disposals to get around antitrust concerns, with analysts saying Heinz HNZ.N may be lined up as a buyer.
Danone has looked to calm nerves over paying too high a price by telling analysts there is no potential deal on the horizon that might require a rights issue of shares, while analysts added that an acquisition by Mead of a third of the Pfizer business would be financially manageable and earnings accretive.
Pfizer's chief executive Ian Read has 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 conducted in New York, with Morgan Stanley and Centerview Partners advising Pfizer. All parties involved have declined to comment.
Reporting by Victoria Howley and David Jones; Editing by Will Waterman