Sandoz to buy Gerber for $3.7 billion

May 24, 1994|By Los Angeles Times The New York Times News Service contributed to this article.

Baby foods giant Gerber Products Co., whose products have been a staple in new parents' cupboards for nearly 70 years, yesterday agreed to be acquired by Swiss pharmaceuticals conglomerate Sandoz Corp. for $3.7 billion in cash.

The deal would allow Gerber, which claims more than 70 percent of the large but stagnant U.S. baby-food market, to seek faster growth overseas through Sandoz's international network of subsidiaries and distributors.

Sandoz, in turn, acquires one of America's best-known brand names as it expands its own fast growing foods business, which includes Ovaltine malted drinks.

While most analysts praised the deal, many were shocked by the high price Sandoz offered -- $53 for each Gerber share, or a 53 percent premium over last week's closing price. Gerber's shares shot up $15.50 yesterday, to close at $50.125, on the New York Stock Exchange.

"They paid top dollar," said food industry analyst John M. McMillin of Prudential Securities Research. "Gerber has a solid franchise."

However, the Fremont, Mich.-based company's franchise is domestic, and some analysts questioned Sandoz's high price for Gerber, given the costs and tough competition it faces in promoting unfamiliar brands in foreign markets.

"It's virtually unknown outside of a few markets," said William Leach, an industry analyst at Donaldson Lufkin & Jenrette.

Only 10 percent of Gerber's $1.2 billion in sales came from overseas. Of particular interest have been underdeveloped countries in Eastern Europe and Latin America, where commercially made baby foods are not widely available.

Meanwhile, at home, a nearly stagnant birth rate in the United States has left Gerber, which markets more than 250 varieties of baby food, struggling to boost sales and profits. Analysts said the company's baby food volume declined 2 percent last year, and the company launched a reorganization to cut operating costs.

Sandoz, based in Basel, is the second Swiss drug company to announce plans recently to acquire an American company. On May 2, Roche Holdings said it planned to buy Syntex Inc., a Palo Alto, Calif., drug maker, for $5.3 billion.

"There's more coming," Samuel D. Isaly, a pharmaceutical analyst with Mehta & Isaly in New York, said. He said Swiss companies were rushing to act before a change in international accounting practices takes effect Jan. 1.

The change will force the Swiss companies to report goodwill, the difference between a purchase price and the book value of an acquisition, as a charge that is amortized over the years against earnings. U.S. companies already do this.

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