(Reuters) – Nestle is in “advanced discussions” to merge its international ice cream business with R&R Ice Cream, in its latest effort to refocus on other, higher-performing brands.
The world’s largest packaged food company announced the talks on Monday, after Reuters reported that R&R, maker of Cadbury Flake Cones, Rowntree’s Fruit Pastille lollies and Kelly’s Cornish ice cream, was in talks with Nestle to form a 50/50 joint venture in a 3 billion euro ($3.4 billion) deal.
Nestle said it will contribute its ice cream businesses in Europe, Egypt, the Philippines, Brazil and Argentina, as well as its European frozen food businesses, excluding pizza but including products like frozen cake brand Erlenbacher.
All of UK-based R&R, owned by French private equity firm PAI, will go into the joint venture that will be equally owned by both parties.
“It’s good news and in line with what they started to do four or five years ago,” Vontobel analyst Jean-Philippe Bertschy said. “We’ve been pushing for that for a long time, but I thought they would never get rid of ice cream.”
Besides being far off Nestle’s goal of becoming a “nutrition, health and wellness” company, its ice cream business is a distant No. 2 to world leader Unilever and always had weaker returns than other businesses, he said.
Mass-market ice cream is under pressure as consumer tastes shift toward healthy, fresh food or premium brands, opening up the market to smaller players.
Nestle’s share of the global market, worth $67 billion, is 10.8 percent, less than half of Unilever’s and down from 12.8 percent in 2010, according to market research firm Euromonitor International. R&R has a 0.8 percent share.
Nestle oversees a sprawling portfolio including Gerber baby food, Nescafe coffee, KitKat bars and Purina pet food. That diversification has helped it weather the global economic downturn better than some other companies.
Still, like Unilever and Procter & Gamble, Nestle has been reviewing its portfolio, getting rid of underperforming brands. Over the past two years it has parted with most of its Jenny Craig diet food business, Power Bar snacks, Juicy Juice drink in the U.S., its frozen food business in Spain and its ice cream business in South Africa.
Analysts said that Nestle could next look at doing something similar with its U.S. frozen food business, which includes brands like Stouffer’s and Lean Cuisine, as it has been struggling in recent years.
Nestle’s ice cream business includes more than 150 brands including Movenpick, Nestle Scholler and Extreme. Its ice cream operations in the United States, which include Haagen-Dazs, Edy’s and Dreyer’s, will not be part of the deal.
The new partnership will combine Nestle’s distribution network with R&R’s more efficient manufacturing. It will operate in over 20 countries and employ more than 10,000 people.
Nestle and R&R have history together. R&R, or Richmond as it used to be known, bought Nestle’s UK ice cream business in 2001, giving it brands including Fab and Smarties.
Terms of the latest deal and its advisors were not disclosed. But a source familiar with the matter previously told Reuters that Credit Suisse was advising Nestle, while PAI was being advised by Rothschild. Both banks declined to comment.
The plan is for PAI to exit in a few years’ time and for Nestle to list the business, the source added.
PAI bought R&R, Europe’s largest private-label ice cream maker, in 2013 from Oaktree Capital Management for around 850 million euros. Private equity firms typically aim to own businesses for four to six years.
By Freya Berry and Martinne Geller (Editing by Keith Weir and Susan Thomas)
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