Pepsi and Nestle Talk Merger-Junk Food Spoils Megadeal

Pepsi and Nestle Talk Merger-Junk Food Spoils Megadeal

Health food -- of all things -- may have gotten in the way of a marriage of snack-food titans.

PepsiCo Inc., the maker of Doritos and Pepsi-Cola, explored a merger with Nestlé SA in late spring, which would have created an immense global food concern with increasing emphasis on "wellness" products. The effort was ultimately scuttled over a host of complications, according to people familiar with the matter.

PepsiCo made the initial approach, according to a person familiar with the situation. But Nestlé resisted the idea for fear that Pepsi's reliance on snacks such as potato chips and soft drinks would dilute its mission of building a business around more-healthful food and beverage products. There was also an array of issues in combining PepsiCo, with a $108 billion market capitalization, with the larger Nestlé, which carries a $150 billion market value and is based in Vevey, Switzerland.

There are currently no talks about a deal, these people said.

PepsiCo declined to comment. A Nestlé spokesman said the company "has not been pursuing anything outside of our stated strategic acquisition interests, which are in the area of nutrition."

A record spree of private-equity deals has been getting the attention of both investors and the media. But the pace of those deals is expected to slow down, as the market tries to digest some $200 billion of announced transactions. That hasn't stopped big strategic buyers from stepping to the fore. Loaded with excess cash and healthy stock prices, they are again considering the kinds of plucky combinations that came to define the last merger boom of 1996-2001.

Indeed, Pepsi's move raises the question of what's next for the Purchase, N.Y., food conglomerate. Chairman and Chief Executive Indra Nooyi has steadily won over Wall Street investors with rock-solid sales and earnings growth. The company's shares traded yesterday at $66.13, about in the middle of their 52-week trading range.

Without Nestlé or another big acquisition, the question for Pepsi is how it will deepen its health-and-wellness portfolio, an effort it is increasingly emphasizing.

After reformulating some of its foods with more-healthful oils in the U.S., it is doing the same overseas, where it is also reducing salt and adding oat and grain products. Yesterday, Pepsi, along with several other food companies, pledged to limit marketing to children.

The risk to Pepsi is these nods to wellness will hurt sales, pushing the company's shares down. Without more-healthful brands that Pepsi can pitch to everyone, its growth prospects could be limited.

Questions about Pepsi's next big move are also growing as rival Coca-Cola Co. has been on an innovation-and-acquisition spree of its own, expanding aggressively into a beverage area dominated by Pepsi: noncarbonated drinks. Coke last month snapped up Energy Brands Inc., maker of Glacéau Vitaminwater, for a hefty $4.1 billion and is considering more acquisitions, including possibly Snapple drinks, owned by Cadbury Schweppes PLC.

Ms. Nooyi helped to craft and implement Pepsi's current market strategy in the mid- and late-1990s. That strategy was to transform PepsiCo into a maker of a broad range of convenience foods and beverages, rather than focused so heavily on snacks and soda.

She appears to be continuing that strategy by looking to expand into or possibly acquire businesses that focus even more on healthful products and nutrition. As sellers of junk food continue to be targeted by public-health experts and activists -- and as consumers demand foods and drinks they believe will make them healthier -- Pepsi will be under pressure to keep expanding the parts of its business that look the least like junk food.

Ms. Nooyi is not shy about doing big deals. She was a driving force behind PepsiCo's purchases of Tropicana and Quaker Oats Co. In the past few years, Pepsi management has toyed with acquiring Group Danone SA, maker of Evian water and Dannon yogurt.

Nestlé's expertise in nutrition, including a research center and recently acquired clinical-nutrition and Jenny Craig diet-products businesses, would allow Pepsi to intensify its research and development into health-oriented and diet foods and drinks.

That said, Nestlé is still a huge purveyor of ice cream, candy bars and chocolate milk. The company has a joint venture with Coke to distribute some of its beverages.

A combination with Nestlé would also expand PepsiCo's international reach. PepsiCo wants to reduce its reliance on the U.S. market, where sales growth has slowed. PepsiCo's international division, including both its Frito-Lay snacks and Pepsi beverages, now delivers about 50% of the company's overall profit growth.

Since late last year, Nestlé has spent $10 billion to buy the clinical-nutrition business and the Gerber baby-food brand from Novartis AG. For last year, it posted about $82 billion in sales.

Internally, it has invested heavily in reformulating many products to be healthier, betting that consumers will pay more for foods that help them lose weight, age better or fend off disease. For example, it added vitamins to its milk products for children.

Since taking over as CEO in 1997, Peter Brabeck has revamped Nestlé's stable of brands, by selling off slow-growing items such as canned tomatoes and making a series of multibillion-dollar acquisitions in higher-growth areas. Since 2001, he has bought Ralston Purina pet food, Dreyer's ice cream and Hot Pockets sandwiches, among other brands.

Nestlé has ample firepower for a large acquisition. It owns 75% of eye-care company Alcon Inc., a holding that analysts regard as currency for a large acquisition, given that Nestlé could easily sell off the stake and raise as much as $33 billion. Nestlé is one of only a handful of companies in the world that maintain a triple-A credit rating, and it could raise its debt levels to finance a large acquisition.

In October, Nestlé's board is expected to choose a successor to Mr. Brabeck, 62 years old, who will remain as chairman. Periods of transition are often when big mergers occur. Last year, Nestlé hired Paul Polman, a Dutch-born veteran of Procter & Gamble Co., to be its chief financial officer. Mr. Polman has been charged with heading a major efficiency drive within the Swiss titan, a project Mr. Brabeck regards as one of his major legacies. Mr. Polman is regarded as a leading CEO candidate, although Nestlé's chief marketing officer, Lars Olofsson, as well as Paul Bulcke, head of Nestlé's Americas business, are also considered possible successors.