April 12, 2007/LONDON (MarketWatch) -- Nestle SA said it is buying the U.S. Gerber baby food business of Swiss drug maker Novartis AG for $5.5 billion in cash, confirming a long-awaited deal to expand its nutrition business.

Gerber, a household name in the U.S., is growing at an annual rate of 8.5% and will generate an estimated $1.95 billion in sales in 2007, Nestle said. It added that the transaction will start improving its operating profit margin immediately and give its growing nutrition business, which includes infant formula, baby food, medical nutrition and weight management, annual sales of 10 billion Swiss francs ($8.2 billion).

According to data from market research firm Euromonitor, Gerber had a 75% share of the U.S. prepared baby-food market in 2005.

Novartis, the world's fourth-largest pharmaceutical company, said that the sale completes a series of divestments aimed to refocus its business on healthcare. The deal, which requires customary regulatory approvals, is expected to be completed by the second half of 2007.

Novartis shares slipped 0.2%. Nestle shares fell 0.1%.

Nestle, which also makes Nescafe coffee, KitKat chocolate bars and Perrier water, has ambitious plans for Gerber, which it wants to expand in the U.S. and also abroad. Although Nestle has a large portfolio of baby brands in the U.S., it lacked a baby food brand and had long coveted Gerber, which it first tried to acquire in the early 1990s.

The Gerber deal comes a few months after Nestle bought Novartis medical nutrition business for $2.5 billion and the U.S. weight-loss firm Jenny Craig for $600 million as part of its strategy to move away from mass items like bottle milk move and toward higher-margin foods.

The deal is expected to generate cost savings of $95 million, or 5% of sales, by 2011.

Merrill Lynch analysts said that strategically the deal is in line with Nestle's new focus on the high-margin nutrition business. It noted that despite Gerber's huge share of the U.S. baby food market, Novartis had been milking it rather than growing it.

"Nestle will focus on reinvigorating the top line" the broker said.

Financially, Merrill said Nestle again have paid a "hefty price," as analysts' expectations hovered around $5 billion.

Citigroup analysts, however, said the multiples look reasonable and that the deal gives it increased confidence that Nestle will meet its nutrition targets of 10% organic growth and 20% margin.

Separately, Novartis said that it has appointed Joseph Jimenez as the chief executive officer of its consumer health division as of April 16. He replaces Paul Choffat who is retiring at the end of April.

From the April 23, 2007, Prepared Foods e-Flash