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Breakingviews

Why a Nestlé Skin Care Unit Is Attractive to Private Equity

Nestlé’s skin care division, which makes a Botox rival called Dysport, might prove to be attractive to private equity firms.Credit...Steve Forrest for The New York Times

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Nestlé has struggled to capitalize on its skin care division, but a buyout group might be able to overcome that spotty history.

Facing pressure from the activist investor Dan Loeb, Nestlé’s chief executive, Mark Schneider, announced earlier this year that the company would conduct a review of the division that his predecessor bought only four years ago. It has been a rocky period: Nestlé underestimated patent expiries and was forced to take a 2.8 billion Swiss franc impairment last year. The unit’s margin on earnings before interest, taxes, depreciation, and amortization has fallen to 13 percent, according to analysts at the research company Bernstein.

The skin care unit, which makes a Botox rival called Dysport, could fetch at least 6 billion Swiss francs, or about $6 billion, if it were sold. But selling to another consumer group would be difficult: The business includes both simple over-the-counter and more complex prescription products.

Instead, it would fit more easily into a conventional drugmaker. But antitrust issues probably rule out U.S. peer Allergan. And Johnson & Johnson, the most likely strategic acquirer, is probably more interested in acquiring innovative medicines than skin creams.

Buyout firms, including Apax Partners and KKR, are eyeing the business according to Bloomberg. Demand for beauty treatments means that private equity is dabbling with dermatology — Bain Capital, for example, bought a stake in the Botox maker Hugel last year. Nestlé’s unit could deliver a private equity-style return.

A deal wouldn’t come cheap. Even the lowest mooted price tag would be equivalent to around 17 times this year’s earnings of 362 million Swiss francs, as estimated by analysts from Bernstein. That is in line with the average deal multiple in the consumer sector since 2005. Even using debt of six times earnings, a private equity buyer would need to stump up equity of 3.8 billion Swiss francs.

Luckily, the business is growing, and can be improved. If the buyer grew sales by 5 percent a year and boosted the margin to 20 percent, analysts could hit 715 million Swiss francs in five years. An exit on a similar multiple would give an enterprise value of just under 12 billion Swiss francs and equity of 9.7 billion Swiss francs, representing an internal rate of return of around 20 percent, according to estimates by Breakingviews estimates.

With the promise of such plump returns, Nestlé can expect plenty of suitors.

Carol Ryan is a columnist at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com

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