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Nestle May Sell Assets to Get OK for Dreyer's Deal

The food firm could give up ice cream brands or contracts to appease regulators, analysts say.

February 03, 2003|From Bloomberg News

VEVEY, Switzerland — Nestle, the world's biggest food company, might give up some brands or distribution contracts to win U.S. approval for its $2.4-billion plan to gain control of Oakland-based Dreyer's Grand Ice Cream Inc., analysts said.

The Swiss company might share or abandon the distribution by Dreyer's of Unilever's Ben & Jerry's, sell the Dreamery brand or stop making ice cream for other companies such as Starbucks Corp. and Campbell Soup Co., they said. Nestle spokesman Marcel Rubin declined to comment.

Gaining control of Dreyer's would make Nestle No. 2 in the $13-billion U.S. ice cream market, where it already owns Haagen-Dazs. Dreyer's has sales of $1.4 billion and a distribution system that serves 59,000 stores in 48 states.

"It's the strength of distribution that may be an issue," said James Amoroso, an analyst at Pictet & Cie in Zurich, Switzerland, who has a "buy" recommendation on Nestle shares.

The food maker is challenging Unilever, which owns Breyers, for leadership of the $25-billion global ice cream market. In the U.S., Dreyer's would give Nestle an 18% market share, just behind Unilever's 19%. It currently has less than 10%.

Nestle, which holds 23% of Dreyer's, agreed in June to give the company its U.S. ice cream assets in exchange for 67% of the combined business. The companies agreed to extend a Federal Trade Commission review to Feb. 14.

In 2001, Nestle gave up two brands to allay antitrust concerns in its $11.2-billion purchase of Ralston Purina Co.

Nestle's leaders have "shown that they're able to work with regulators and come up with a solution that works for everyone," said Thomas Russo, who helps manage more than $1 billion in investments at Gardner, Russo & Gardner, including 1 million Nestle American depositary receipts. "Distribution will be a key issue."

Dreyer's posted 2001 revenue that doubled Nestle's ice cream sales in the U.S., analysts said.

Distribution of Ben & Jerry's could be weakened if Nestle focused on Haagen-Dazs, analysts said. Dreyer's expanded its delivery of Cherry Garcia and other Ben & Jerry's brands in U.S. grocery stores in a five-year contract that began last year.

Representatives of Ben & Jerry's and Unilever in the U.S. were unavailable for comment.

Dreyer's also distributes Nestle frozen desserts such as Icescreamers and ConAgra Foods Inc.'s Healthy Choice ice cream.

The Dreyer's distribution agreement with Ben & Jerry's "will have to be jettisoned or amended so that there's not one truck bringing Ben & Jerry's and Haagen-Dazs," said Tom Burnett, president of Merger Insight, an affiliate of Wall Street Access that provides institutional research on mergers and acquisitions.

The regulators may ask Nestle to end the contract or make changes such as allowing Unilever flexibility to find other distributors, analysts said.

Another hurdle might be Nestle's U.S. lead in so-called super-premium ice cream, the luxury segment accounting for 3.5% of U.S. volume sales, according to the International Dairy Foods Assn. Web site, citing 2001 supermarket statistics.

Nestle's takeover of the Haagen-Dazs brand in the U.S. in 2001 gave it control of 36% of the super-premium market, ahead of Ben & Jerry's 35%, according to an HSBC report that quoted Dreyer's. Analysts estimate that the Dreamery, Godiva and Starbucks brands each have less than 10%.

Dreyer's formed a joint venture in 1995 with Starbucks to create a line of coffee ice cream. It entered a licensing agreement in 1999 to produce Godiva ice cream for Campbell Soup.

On Friday, Nestle's shares rose $3 to close at $52.10 in over-the-counter trading. Dreyer's gained 44 cents to close at $71 on Nasdaq.

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