Heinz eyes baby-food sales amid China boom

| Friday, April 30, 2010

The H.J. Heinz Co. is looking to the world's largest baby food-consuming nation to build that portion of its food operations, analysts said.

The strategy includes constructing an infant formula business in China through acquisition of a regional baby-food maker in the Far East country, building on a 25-year presence in China, said Sanford C. Bernstein & Co. analyst Alexia Howard.

Heinz disclosed plans to begin infant formula operations in China and Russia and grow its child nutrition business in India during an analyst conference in February.

"Heinz has said many times that baby food is its highest-margin business, yet makes up just 11 percent of its sales," Howard said. "It's also talked about doing bolt-on, smaller deals."

"To the extent we can find the right acquisition, we would look there as well," Heinz Chief Financial Officer Art Winkleblack told Bloomberg News. "The infant formula market is still highly fragmented outside the U.S. In China, there are eight or 10 players who have a piece of the pie, and not all of them are folks you would recognize."

Heinz's baby-food business represents about $1.1 billion of the Pittsburgh-based food manufacturer's $10 billion in worldwide sales. It is the fifth-largest company in total baby food sales worldwide and No. 3 in the slower-growing prepared baby-food category, according to data from Euromonitor International of Chicago. Heinz no longer sells baby food in the United States.

The company has tried to expand its baby-food business before. In 2000, it attempted to more than double its baby-food market share in the United States with a $185 million deal to acquire the parent of infant-food maker Beech Nut Nutrition Corp. But the Federal Trade Commission ruled against the deal, saying the combined Heinz-Beech Nut would have controlled about 25 percent of the baby-food market. Gerber Products at the time controlled about 73 percent of the market.

Heinz exited baby food in the United States in 2002, when it sold the business to Del Monte Foods for $1.9 billion as part of a package deal that included its tuna, pet food and private-label soups operations. Del Monte four years later sold the baby food and soup operations to TreeHouse Foods.

Infant formula in China represents a potential market estimated at between $2 billion and $3.7 billion, depending on the age range Heinz targets, according to Howard. The company has a 3.1 percent market share of the entire Chinese baby-food market, he estimates, which includes about 48 percent of the prepared baby-food market. That huge market share could serve Heinz well in establishing infant-formula operations.

Potential takeover targets for Heinz include Rockville, Md.-based Synutra International Inc., whose products are sold exclusively in China, and Ausnutria of Changsha, China, Howard believes.

"Heinz does not comment on rumors or speculation. Heinz continually evaluates bolt-on acquisition opportunities as part of our overall growth strategy," said Heinz spokesman Michael Mullen.

Synutra holds the No. 5 infant-formula position in China, with sales of about $266,400, according to Datamonitor. The company's market capitalization is $1.2 billion, Howard said. A potential problem with Synutra is that it gets its milk products for infant formula from sources inside China.

Using Chinese sources for its products could cause Heinz to shy away from a Synutra deal, since the 2008 melamine contamination scare in China has caused that nation's mothers to shun domestic products.

Melamine is a chemical used in the production of plastics that can make protein levels in watered-down milk appear higher. Milk powder tainted with the chemical killed at least six babies and sickened about 300,000 others two years ago, according to government figures.

"Ausnutria holds 2 percent of the Chinese infant-formula market (about $74,000 in annual sales), has a market capitalization of $761 million, and sources its milk products from Australia," Howard said.

Either company would give Heinz a platform upon which to build, she added.

The $34.3 billion global baby-food category, which includes formula, has been consolidating. Nestle SA of Vevey, Switzerland, acquired Gerber from Novartis AG in August 2007, and Danone SA bought Numico later that year.

Mead Johnson Nutritional Co., the maker of Enfamil infant formula that split from parent Bristol-Myers Squibb Co. last year, may draw bids from Danone, Nestle or Heinz, according to analysts including Christopher Growe with Stifel Nicolaus & Co. in St. Louis and Bank Vontobel AG's Claudia Lenz in Zurich, Switzerland.

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