November 6, 2018 / 2:28 PM / 9 days ago

Breakingviews - Private equity could scratch Nestlé skin-care itch

FILE PHOTO: Nestle CEO Ulf Mark Schneider (L) attends the Nestle shareholders meeting in Lausanne, Switzerland, April 6, 2017. REUTERS/Denis Balibouse/File Photo - RC1715A9CF40

LONDON (Reuters Breakingviews) - Acne and other skin creams have had a spotty record at Nestlé, but a buyout group might do better. A unit at the world’s biggest food group that makes Botox rival Dysport may fetch at least 6 billion Swiss francs ($6 billion). Rival consumer groups may be put off by the business’s products and low margins, but they could appeal to a private equity firm. Facing pressure from activist Dan Loeb, Nestlé Chief Executive Mark Schneider announced a review of the division that his predecessor bought only four years ago. It’s been a rocky period: Nestlé underestimated patent expiries and was forced to take a 2.8 billion Swiss franc impairment last year. The unit’s EBITDA margin has fallen to 13 percent, Bernstein analysts reckon. Selling to another consumer group looks difficult. The business includes both simple over the counter and more complex prescription products. It would fit more easily into a conventional drugmaker. Antitrust issues probably rule out U.S. peer Allergan. The most likely strategic acquirer is Johnson & Johnson, but it is probably keener to acquire innovative medicines than skin creams. Buyout firms including Apax Partners and KKR are eyeing the business according to Bloomberg. Demand for beauty treatments mean private equity is dabbling with dermatology - Bain Capital, for example, bought a stake in Botox maker Hugel last year. Nestlé’s unit could deliver a private equity-style return. A deal wouldn’t come cheap. Even the lowest mooted price tag would be equivalent to around 17 times this year’s EBITDA of 362 million Swiss francs, as estimated by Bernstein analysts. That’s in line with the average deal multiple in the consumer sector since 2005. Even using debt of say six times EBITDA, a private equity buyer would need to stump up equity of 3.8 billion Swiss francs. Luckily, the business is growing, and can be spruced up. If the buyer grew sales by 5 percent a year and boosted the margin to 20 percent, EBITDA could hit 715 million Swiss francs in five years. An exit on a similar multiple would give an enterprise value of just under 12 billion Swiss francs and equity of 9.7 billion Swiss francs, representing an internal rate of return of around 20 percent, according to Breakingviews estimates. With the promise of such plump returns, Nestlé can expect plenty of suitors.

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