Nestle to Buy Novartis Unit,
Expand Nutritional Operations

Nestle SA said Thursday it is buying the medical-nutrition business of Swiss drug maker Novartis AG for $2.53 billion, in a deal that underlines the world's largest food company's determination to focus more on health food and wellness products.

For Novartis, based in Basel, the deal means a further step in focusing on medical products, ranging from prescription medicines to generics and vaccines. The company still owns the Gerber brand of baby-food products, which isn't part of the deal.

For Nestle, based in Vevey, Switzerland, the deal represents a big leap forward in its strategy to expand its operations in nutrition, a market it expects to grow at a faster pace than the traditional food market. Nestle is willing to pay a hefty sum for the unit, acquiring it at a price of around 2.8 times annual sales, but the company will still lag in size behind Dutch baby food and nutritional supplement company Royal NumicoNV in that particular food-market niche.

"This is a very important step for the Nestle Group in its strategic transformation process to a nutrition, health and wellness company as it strengthens the core of our globally managed Nestle Nutrition business," said Nestle chief executive Peter Brabeck-Letmathe.

Novartis, based in Basel, said the deal still requires approval from regulators and will probably be completed in the second half of 2007. "Following our long-term strategy, this divestment continues to enhance our focus on healthcare, further strengthens our financial position and provides strategic flexibility," said Daniel Vasella, Novartis chairman and chief executive.

With annual sales of $950 million, Novartis's medical nutrition business is the world's second-largest supplier of medical nutrition and medical devices used to provide essential nutrients to patients with special medical conditions. These products are often required when illness or disabilities limit the ability of patients to eat a balanced diet.

Nestle already has a nutrition business, but its strengths are in other geographic regions and in different products. Because the two businesses are complementing each other nicely, Nestle doesn't expect the acquisition to have a material impact on group earnings in the short term.

Nestle also said that all options concerning a possible share buyback are open. "We will make an announcement about any share buyback in due time," said Nestle spokesman Francois-Xavier Perroud.

Nestle's failure to announce another share buyback has recently encouraged speculation that the food company may be savings its cash for a big takeover.

The acquisition had been expected after several media reported in recent weeks that the two companies are in talks.