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Nestle to buy General Mills, rumors say

After General Mills beat out Nestle in a bid to acquire a 51% stake in Yoplait, the Swiss food giant may return with a bid of its own to purchase 100% of General Mills and its assets. The acquisition could prove fruitful for both in the natural products industry, combining Nestle's expertise in functional food and General Mills' portfolio of organic brands.

General Mills may be taking marching orders from a new commander: global food industry leader Nestlé. This month, Wall Street rumors alluded to Nestlé’s potential acquisition of General Mills in a deal that would allow two major industry players to combine their enormous but complementary product portfolios.

In March, Nestlé and General Mills bid against each other in an attempt to acquire French dairy processor Yoplait. General Mills won the bid, acquiring a 51% stake in the company for nearly $2.2 billion. In a strange twist, Nestlé may still get its daily dose of calcium, by acquiring General Mills and the newly acquired Yoplait, for around $40 billion. General Mills shares have climbed $3.16 – from $36.00 to $39.16 in April alone, amidst acquisition rumors. As of April 3, 2011, General Mills is valued at $24.9 billion – $39.16 a share with 634.40 million shares outstanding.

Nestlé and General Mills already have a lucrative relationship, Cereal Partners Worldwide (CPW), a 50/50 joint venture worth about $2.8 billion in annual sales. This working relationship, which began in 1989, requires the CEOs of both companies to work closely on major projects. CPW employs over 4,000 people in 40 countries and manages 14 factories and 50 brands in 130 countries. In this partnership, Nestle shares its distribution knowledge and worldwide brand strength while General Mills provides its expertise in cereal marketing and production.  The cereals are sold under the Nestlé brand name.  Interestingly, when the companies formed CPW, the agreement included a clause preventing a takeover, which both companies would now have to voluntarily modify.

Affect on natural, organic and healthy products market

If Nestlé were to take over General Mills, the new company could capitalize on two growth areas: Nestlé’s functional foods expertise and General Mills' organic product knowledge. According to initial 2010 estimates by Nutrition Business Journal, functional foods grew 2.7% last year; meanwhile, the organic industry grew 7.7%. Both of these segments outpaced the growth of total food sales which crept along at 0.6%. The options in functional food and organic could be limitless.

Nestlé would also have access to the organic ingredients grown at General Mills' Cascadian home farm in Washington’s Upper Skagit Valley. The farm’s produce is used in making the brand’s 75 organic products including cereals, granola bars, frozen fruits, frozen vegetables and fruit spreads. Nestlé would also gain control of the Muir Glen and Larabar brands. Larabar boasted particularly strong growth of 20% in 2010.

Nestlé could benefit from General Mills' presence in high growth emerging markets. General Mills has a relatively small foothold in China - generating $350 million there annually - but is expected to increase sales in 2011 after its integration of Yoplait. Dairy consumption in China has seen healthy growth over the past years, and great opportunity exists in marketing yogurt to kids in China. General Mills' El Paso, La Salteno, and Latina brands have also gained popularity in South America and within the Latino community in the United States.

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