Nestle SA’s (A+/Stable/F1+) intensified M&A activity in 2020 confirms, in Fitch Ratings’ view, that proceeds from asset divestments will be redeployed for bolt-on M&A rather than debt repayment.
Along with share repurchases under a CHF20 billion programme, we expect M&A spending to push leverage higher, towards levels commensurate with Nestle’s ‘A+’ rating. We reflected these expectations in the downgrade from ‘AA-‘ in October 2019.
On 31 August 2020, Nestle announced it will acquire the remaining 74% stake in allergy treatment producer Aimmune Therapeutics, Inc. for a total enterprise value of USD2.6 billion.
This large transaction marks a rebound in M&A activity in the sector in 3Q20 after activity slowed in 2Q20 as the coronavirus pandemic created an extremely uncertain operating environment and challenges in the supply chain and the foodservice channel.
The packaged food sector is one of the sectors least affected by the pandemic, and Nestle has demonstrated this by growing its sales organically by 2.8% in 1H20.
The acquisition of Aimmune will add to the CHF1.6 billion already spent on acquisitions in 1H20, which in turn will contribute to total spending in 2020 being substantially higher than the CHF0.7 billion Nestle spent in 2019. In a previous large deal in January this year, Nestle acquired gastrointestinal medication Zenpep.
Both transactions complement Nestle Health Science’s operations – the division focused on nutritional science products and representing, along with food and beverages, Nestle’s core business.
Nestle has been rebalancing its portfolio by shifting away from low-growth operations and those that are no longer strategic. Nestle’s increase in M&A follows a series of asset disposals, including that of Nestle Skin Health and Nestle’s US ice cream operations in 2019-2020 for around CHF14 billion altogether.
We expect the strategic review of parts of Nestle’s water business in North America and of Yinlu Foods Group’s peanut milk and canned rice porridge businesses in China to result in the sale of these operations in 2021. Our rating case assumes that disposal proceeds will be used to fund CHF7.5 billion of M&A over 2021-2023, for the acquisition of businesses that should help Nestle to increase its organic sales growth to 4%-6% from 3.5% in 2019.
Nestle’s ‘A+’ rating reflects our expectation that its funds from operations net leverage will increase towards 2.5x over the next three years from a more conservative 1.7x in 2019. We expect that this will occur as the company completes its CHF20 billion share buyback programme and rebalances its portfolio through bolt-on M&A and divestments.
At the same time, business repositioning towards higher-growth products and geographies will further strengthen Nestle’s business profile, which we believe is in line with the ‘AA’ rating category.