Nestlé Exploring Sale of Its U.S. Confectionery Business -- 2nd Update

By Brian Blackstone Features Dow Jones Newswires

Nestlé SA said Thursday it is considering selling its U.S. confectionery business, maker of such products as the Butterfinger and Baby Ruth candy bars, as packaged-food giants struggle to boost growth and accommodate changing consumer tastes.

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The Swiss-based consumer giant said its U.S. confections business generated about 900 million Swiss francs ($922 million) in sales last year, or 3% of its total U.S. sales. Nestlé said the strategic review now under way doesn't include the company's Toll House baking products.

It wasn't immediately clear what price Nestlé would be seeking or who might be a buyer. Nestlé, the world's No. 3 confectioner by market share, competes with market leader Mars Inc. and second-ranked Mondelez International Inc. around the world.

Italy's Ferrero SpA, the privately held maker of Nutella and Tic Tac, and the global industry's fourth-largest player, has expanded aggressively recently through deals. It pushed into the U.S. by snapping up Chicago-based Fannie May Confections Brands earlier this year.

Sales of chocolate produced by large packaged-food companies have stalled globally in recent years, as consumers flock to healthier offerings. That has set off a round of consolidation across the industry. Last year, Mondelez launched an unsuccessful bid to buy Hershey Co., in a deal that likely would have topped $25 billion.

The possible sale by Nestlé doesn't include its much larger global chocolate business, which includes Kit Kat and chocolate drink Nesquik.

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"Nestlé remains fully committed to growing its leading international confectionery activities around the world, particularly its global brand Kit Kat," Nestlé said.

Nestlé, the world's largest packaged-food company, has struggled for years to boost sales growth as it increasingly competes with a host of smaller players around the world offering healthier options, like organic and locally sourced foods. It suffered especially in North America in the first quarter of this year, where it reported sluggish sales from its confectionery business and pet food brands.

It has fallen to Nestlé's new chief executive, Ulf Mark Schneider, a healthcare-industry veteran, to execute a long-held ambition by the Swiss giant to push more aggressively into healthier foods and make its best-selling staple products, like its Nesquik chocolate mix, more appealing to health-conscious consumers.

The current strategic review follows similar studies by competitors. Unilever PLC said earlier this year it would review whether to sell its margarine and spreads business. That followed an unsuccessful $143 billion bid by Kraft Heinz Co. for Unilever.

Reckitt Benckiser PLC, meanwhile, is shopping its food unit, which includes French's mustard. Conagra Brands Inc., the owner of Slim Jim jerky and Chef Boyardee canned pasta, spun off its frozen-potato business and sold its private-label division in 2016. Last month, Conagra sold the Wesson cooking oil brand to J.M. Smucker Co.

Write to Brian Blackstone at brian.blackstone@wsj.com

Nestlé SA put its U.S. confectionery business up for sale, looking to shed its Butterfinger and Crunch candy bars as it grapples with how to cater to U.S. consumers' increasing demand for healthy snacks.

The unit could be worth as much as $3 billion, based on analysts' valuations of similar businesses. The Swiss-based consumer giant said its U.S. confections business generated about 900 million Swiss francs ($922 million) in sales last year, or 3% of its total U.S. sales.

A U.S. asset sale would be the boldest move yet by Chief Executive Mark Schneider, who took the top job in January after years as a health-care company executive. It has fallen to him to execute one of the Swiss giant's long-held ambitions -- to push more aggressively into healthier foods and make its best-selling products like Nesquik chocolate mix more appealing to health-conscious consumers.

Across the industry, sugary drinks, salty snacks, candy and chocolate have all been vulnerable to cost-cutting. "Chocolate is [a] category under pressure amid the trend to health or fitness bars," said Jon Cox, head of Swiss equities at Kepler Cheuvreux.

Nestlé is the No. 3 confectioner in the world by market share behind market leader Mars Inc. and second-ranked Mondelez International Inc., and No. 4 in the U.S. behind Hershey Co.

The U.S. is Nestlé's largest market overall, with annual sales of about $27 billion, 51,000 employees and 87 factories, which churn out dozens of well-known brands such as DiGiorno pizza, Haagen-Dazs ice cream and Gerber baby food. In recent years, Nestlé has had some success turning around sales of its frozen-food brands, namely Lean Cuisine.

The decision to potentially leave the U.S. candy business signals new-found decisiveness under Mr. Schneider, said Jefferies analyst Martin Deboo. He said the likely buyer would be a smaller food maker or private-equity firm but wouldn't rule out Hershey or Mars.

Nestlé said the internal strategic review now under way doesn't include its Toll House baking products, nor its global confectionery business, which is much larger than the U.S. business and includes the Kit Kat brand. Kit Kat is licensed by Hershey Co. in the U.S. and by Nestlé in other parts of the world. Nestlé said it remains committed to its global confectionery business, particularly Kit Kat.

The pressure on chocolate makers has set off a round of consolidation and cost-cutting across the confectionery industry. Last year, Mondelez International Inc. launched an unsuccessful bid to buy Hershey, in a deal that likely would have topped $25 billion. Mondelez said it's pleased with its U.S. candy business. Hershey, meanwhile, has acquired a chocolate-covered fruit brand and a beef jerky company in recent years to get a bite of healthier-minded consumers.

Earlier this year, Mr. Schneider ditched Nestlé's longstanding organic growth target of 5% to 6%, dubbed "the Nestlé model," after the company missed it for a fourth-straight year.

Italy's Ferrero SpA, the privately held maker of Nutella and Tic Tac, and the global industry's fourth-largest player, has expanded aggressively recently through deals. It pushed into the U.S. by snapping up Chicago-based Fannie May Confections Brands earlier this year.

U.S. candy makers face competition not only from healthier snacks, but also from anything that occupies consumers' idle time -- including technology and social media, said Nielsen analyst Jordan Rost. "They are fighting against more competitors than ever before," he said. At the same time, food makers are under pressure to aggressively lower costs to maintain profit margins amid the slower sales.

U.S. companies including Kellogg Co. and Campbell Soup Co. have closed factories and cut corporate head counts. Earlier this year, Hershey said it would cut 15% of its global workforce in an effort to boost profitability over the next two years.

Sales at large packaged-food companies globally, and particularly in the U.S., have stalled as consumers flock to fruit-and-nut bars and Greek-style yogurt. Startups have been fast to launch trendy good-for-you items, stealing market share from traditional giants.

Nestlé's strategic review follows similar studies at its competitors. British consumer-goods giant Unilever PLC said earlier this year it would review whether to sell its margarine and spreads business following an unsuccessful $143 billion takeover bid by Kraft Heinz Co.

Reckitt Benckiser PLC, meanwhile, is shopping its food unit, including French's mustard. And Conagra Brands Inc., owner of Slim Jim jerky and Chef Boyardee canned pasta, sold its Wesson cooking oil brand to J.M. Smucker Co. last month.

Executives at these companies say by letting go of smaller or underperforming brands, they can focus more time and money on the ones that have more potential for growth.

Nestlé has made efforts to revive its U.S. business by offloading lackluster brands like Juicy Juice, PowerBar and its Jenny Craig diet business and combining purchasing and other operations to reduce costs.

Write to Brian Blackstone at brian.blackstone@wsj.com and Annie Gasparro at annie.gasparro@wsj.com

(END) Dow Jones Newswires

June 15, 2017 21:21 ET (01:21 GMT)