Novartis Drinks Up and Leaves

The recent announcement by Novartis of its intention to sell off its health and functional food operations and focus on its core healthcare business has sparked interest across the food and beverage industry. The divestment of brands “whose growth can be accelerated in companies where there is a good strategic fit”, has resulted in a slew of potential suitors keen to snap up one or more brands for their own portfolios.

With negotiations as yet at an early stage, and with an undoubtedly long list of interested parties, it is likely to be at least another two months before deals are agreed. Swiss food giant Nestlé and the Dutch functional food group Wessanen were among the first to express informal interest.

Key Novartis brands

Food & Beverage: Ovaltine (Ovomaltine), Caotina, Lacovo, Options

Health Food & Slimming: Céréal, Gerblé, Gerlinéa, Modifast, Dietisa, Pesoforma, Lecinova, Milical

Sports Nutrition: Including Isostar, Powerplay, Mineralplus

Novartis is looking at ways of maximising revenues from the divestment, given that there are virtually no players with the same balance of interests capable of taking on the entire portfolio. While it is unlikely to sell off brands individually, the company is reviewing whether to sell them by subdivision, or some combination of core and minor brands, depending on the strategic interests of the main players in a position to bid.

With many players keen to consolidate their positions within the rapidly growing functional food and drinks market, bidding will be fierce – particularly for well-established hot drink brands Ovaltine and Options.

Nestlé has hots for Ovaltine

Nestlé, global leader in malt-based and chocolate-based hot drinks with brands including Nesquik, Milo and Nescau, has publicly expressed a platonic interest in acquiring Ovaltine, which accounts for just over 15% of total value sales of malt-based drinks worldwide, commanding a quarter of the UK market alone.

Nestlé’s own malt-based drinks brand, Milo (which does not have a major presence in Europe), accounts for just over 25% of value sales worldwide, with a large proportion of this stemming from sales in Asia Pacific and Africa & the Middle East. The purchase of Options, Caotina and Lacovo would complement its present geographic coverage and give the company an unassailable global share of 34%.

Furthermore, although Nestlé sold off its slimming aid brand Sweet Success in the US at the start of 2001, interest in Novartis’ Health & Slimming brands cannot be ruled out.

Carbonates producers add fizz to bidding

Soft drinks manufacturers looking to offset sluggish sales of carbonates and diversify into other areas, will no doubt add more fizz to the bidding. Functional food drinks offer strong potential for growth: value sales of functional drinks (including energy and sports drinks) are expected to grow by 35% in real terms between 2001-06, and malt-based hot drinks by 22% in the same period. This compares to 10% growth for carbonates.

The Coca-Cola Co and PepsiCo are also struggling with flat sales in their biggest market, the US, where they have faced criticism for contributing to the growing incidence of child obesity and diabetes, reportedly linked to excessive consumption of sugary drinks.

In line with attempts to reduce its dependence on carbonates, which have already seen The Coca-Cola Co expand into bottled water (with brands such as Ciel and Bonaqua) and sports drinks (Aquarius and Powerade), it has recently turned its interest to dairy drinks, announcing plans to launch chocolate-based dairy drink Choglit later this year. Acquisition of Novartis’ Food & Beverage brands would give it an immediate platform to further implement its strategy of refocusing.

Functional drinks ambitions

PepsiCo already has an interest in hot drinks with brands such as Toddy in Latin America, so the acquisition of Novartis’ functional food drinks would extend this and add to it the cachet of functional drinks producer.

Likewise, its leading energy drink, Gatorade, would be well complemented by Novartis’ Isostar. Gatorade boasts a significant share of virtually all regional markets, with the exception of Eastern Europe, where the functional drinks market is forecast to grow by 73 % over the next five years, and where Novartis’ Isostar already holds 35% of total sales. PepsiCo’s share of the Western European market would also jump from 29% to 40% of total sales with Isostar in its portfolio.

Similar problems of flat carbonates sales will also whet Cadbury-Schweppes’ appetite for the Ovaltine, Options, Caotina and Lacova brands. The producer of Dr Pepper, 7-Up and Orangina already enjoys a top five global position in malt-based and chocolate-based hot drinks, with brands such as Cadbury’s Highlights and Bournvita. Acquisition of Novartis’ food and beverage operation would propel it to second place, behind Nestlé. Likewise Kraft, currently neck-and-neck with Cadbury-Schweppes, would expand its business significantly through such a deal and take second spot.

There is also speculation that a malt-based hot drink would complement Danone’s portfolio. The dairy giant has had success with its functional dairy drink brands Actimel and Calpis Kids, and announced recent plans to expand its kefir production (a traditional functional dairy drink) in Russia, the product’s largest market.

Health Food & Slimming, Sports Nutrition

Novartis’ Health Food & Slimming and Sports Nutrition businesses have fewer suitors, but are expected to be equally well contested. There are a number of companies with the right strategic interests and financial muscle to be serious bidders, with Wessanen being the first to express interest. The company’s Tree of Life subsidiary supplies functional foods, including organic, dietetic products, cereals and snacks, and Novartis’ Health Food and Slimming brands would be an obvious lure.

For both Numico, with its diet and sports nutrition interests, and Japanese nutraceuticals giant Otsuka which boasts the world’s second largest energy drink, Pocari Sweat, acquisition of one or both businesses could offer new opportunities for expansion further afield.

With its acquisition of SlimFast in 2001, which accounts for just over half the global value sales of slimming drinks, Unilever showed its intent to add a more functional feel to its brand portfolio. The sale of Céréal and Modifast could interest other players considering a similar strategy. Equally for Mieji Seika Kaisha and Unibite Nutrition, already major players in the Japanese market for slimming drinks, the purchase of these brands offer a chance to broaden their geographic coverage and stay in touch with Unilever. It remains questionable, however, whether they will have the necessary financial clout or inclination to take on brands outside their domestic sphere.

Bidding underway

The divestment of these brands has sparked interest across a wide range of players, each with differing strategic interests and aspirations. The extent to which the competitive landscape will change depends on how the brands are bundled together, and how these combinations fit with the portfolios of the successful bidders.