Nestle to Buy Ralston Purina for $10.3 Billion Combined Company Will Have 39 Percent of Dog-Food Market Get Quote, Company Info: <A HREF="aol://4785:NSRGY">NSRGY</A>, <A HREF="aol://4785:RAL">RAL</A> By Marcel Michelson Reuters ZURICH, Switzerland (Jan. 16) - Swiss foods group Nestle SA on Tuesday agreed to buy Ralston Purina Co. in a $10.3 billion deal, turning one of its fastest growing business areas into the world's largest pet-food company. Nestle is offering $33.50 in cash per share for the outstanding shares in Ralston, a 36 percent premium to the closing price for Ralston on Friday, January 12 and valuing the U.S. firm's total equity at $10 billion. Nestle will also assume $1.2 billion in debt but will gain $0.9 billion from Ralston's financial investments. The Swiss company, whose existing brands in the over $33 billion a year pet-food market include Friskies cat food and Mighty Dog, has seen the business become one of its fastest growing areas since its entry into the market in 1985. The merged Nestle Purina Pet Care's pet-food sales will reach $6.3 billion, putting it ahead of the previous market leader, privately held Mars Inc., which had sales last year of $5.85 billion. Among Nestle's businesses only chocolate is a larger market, at some $40 billion. "It's a really good thing for Nestle. Ralston is second worldwide in pet food sales, behind Mars," said analyst Amanda Hopkins at fund managers Union Bancaire Privee in Geneva. "Pet-food sales are growing by about 6.5 per cent annually, about double that for human food." TOP PRICE Nestle shares were 1.6 percent higher at 3,528 Swiss francs at 1212 GMT. The share has outperformed the SMI blue-chip index by 7.50 percent in the past year. Ralston's businesses are mainly in the U.S. where it has 27 percent of the dog food market and a third of the cat food market. Nestle will be able to leverage Ralston's brands through it worldwide distribution system. With its Purina Dog Chow brand, Ralston had North American sales of more than $2.25 billion in 2000 and international sales -- in Latin America and Europe -- of some $450 million. At 18.6 times earnings before interest and taxes, analysts described the price as quite high but also said Nestle will be able to absorb it as Ralston has a high earnings before interest and taxes (EBIT) margin of 21 percent. "They are acquiring a market leader with good margins and growth potential," said Rene Weber, analyst at investment bank and fund managers Vontobel. People familiar with the deal said Nestle will use around $7.0 billion of debt to pay for Ralston with the rest coming from its own resources. Nestle had 8.7 billion Swiss francs ($5.3 billion) in cash and other liquid assets at the end of June, and generated operating cash flow of 3.2 billion in the first half of 2000. Nestle's Chief Financial Officer Mario Corti said the cost of capital used for the deal would be less than six percent. It would be earnings neutral for Nestle immediately after the deal, but will grow two percent at the end of first year and up to three percent thereafter. NO NEED FOR FRESH EQUITY Corti said Nestle will not issue fresh equity but would sell Ralston's stakes in DuPont, Conoco and Interstate Bakeries, aggregating $900 million. It could also sell its so-called Treasury stock -- Nestle shares the company owns itself. Nestle will incur restructuring costs of $250 million over two years but that will be offset by annual synergies of $260 million after three years. Much of the synergies will come by consolidating supply chains and dry pet food factories in the U.S. where there will also be some job cuts. The U.S. Friskies business will be merged with Ralston Purina into Nestle Purina Pet Care, based in Saint Louis and headed by Patrick McGinnis of Ralston Purina. Elsewhere the activities will be integrated into Nestle's businesses. Conti said he expected a full review by regulatory authorities and said Nestle would work closely with them. "We are really optimistic and confident that we will be able to reach approvals here that serve the business well," he said. Dresdner Wasserstein Perella acted as financial advisor to Ralston Purina while Nestle was advised by Credit Suisse First Boston and Greenhill & Co. ~**~**~**~**~**~**~**~**~**~**~**~**~** Cindy Curtis, RN, IBCLC mailto:[log in to unmask] http://www.breastfeedingonline.com *********************************************** The LACTNET mailing list is powered by L-Soft's renowned LISTSERV(R) list management software together with L-Soft's LSMTP(TM) mailer for lightning fast mail delivery. For more information, go to: http://www.lsoft.com/LISTSERV-powered.html