NSRGY Nestle SA (PK)

By Eric Sylvers, Saabira Chaudhuri and Annie Gasparro 

Ferrero International SA, the Italian confectionery maker, muscled further into the North America market, agreeing to pay 2.8 billion Swiss Francs ($2.9 billion) in cash to buy Nestlé SA's U.S. chocolate business that includes the Butterfinger and BabyRuth brands.

Ferrero beat out Hershey Co. as Nestlé, based in Switzerland, carried out a monthslong sales process that also drew interest from several private-equity firms.

Adding the Nestlé business, which had about $900 million in sales in 2016, will make family-owned Ferrero the third-biggest chocolate seller in the U.S. It is Ferrero's third sweets acquisition in the country in less than a year as the Italian firm bets billions of dollars on an industry that many companies are turning away from in the wake of a slowdown.

Candy is struggling to compete with healthier snacks like nuts and granola bars, losing shopper dollars and shelf space. While Hershey bid down to the wire with Ferrero for the Nestlé assets, the U.S. company is also diversifying beyond sweets, as is its biggest domestic competitor Mars Inc.

Last year, M&M's maker Mars, the world's largest maker of pet food, purchased a veterinary clinic and dog day-care operator VCA Inc. for $7.7 billion. It also bought a minority stake in KIND LLC, which makes fruit-and-nut bars. For its part, Hershey said last month it would buy SkinnyPop popcorn owner Amplify Snack Brands Inc. in its largest-ever deal valued at $1.6 billion.

But industry analysts say Americans' sweet tooth can still generate growth with investments in innovation and marketing. That is what Ferrero will be counting on. The company has a strong record of innovating and recently released Tic Tac gum, a twist on a mint that has been around for decades.

Ferrero, founded in the small northern Italian town of Alba, is already the world's No. 4 confectionery by market share and had about $12 billion in revenue in 2016.

The acquisition comes on the heels of Ferrero's purchase last year of Ferrara Candy Co., maker of Lemonheads for about $1.3 billion, and the much smaller Fannie May Confections. Ferrero's new strategy of pursuing acquisition-led growth, especially in the U.S., has been spearheaded by Executive Chairman Giovanni Ferrero, the founder's grandson who in 2011 took sole charge of the maker of Nutella spread and Ferrero Rocher chocolates.

In addition to the acquisitions, Mr. Ferrero has sought to promote organic growth with new products, including the recently introduced cookie version of its Kinder Surprise egg that is sold in Europe, but not in the U.S.

Vevey-based Nestlé, which has long tried to position itself as a health-food company, has faced criticism from investors lately for lack of focus, with a brand portfolio ranging from vitamins and bottled water to pizza and ice cream.

Nestlé, which gets only about 3% of its U.S. sales from sweets, insists it is committed to confectionery outside the U.S., although the business isn't among CEO Mark Schneider's major priorities. Globally, over 80% of Nestlé's confectionery business is made up of local brands, a model that differs from many of Nestlé's other big businesses. Nestlé has been launching more high-end chocolate, hoping to chase sales growth as overall chocolate volumes decline. Performance so far has stayed sluggish.

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com and Annie Gasparro at annie.gasparro@wsj.com

(END) Dow Jones Newswires

January 16, 2018 13:07 ET (18:07 GMT)

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