Sandoz to Gobble Up Gerber for $3.7 Billion : Acquisitions: The Swiss conglomerate shocks many analysts by offering $53 a share for the U.S. baby food giant.

Baby food giant Gerber Products Co., whose foods have been a staple in American parents’ cupboards for nearly 70 years, agreed Monday 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% 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, would acquire a well-known U.S. brand name as it expands its own fast-growing food 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% premium over last week’s closing price. On Monday, Gerber’s shares shot up $15.50 to close at $50.125 on the New York Stock Exchange.

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

However, the Fremont, Mich.-based company’s franchise is virtually unknown outside the United States, 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.

Gerber draws only 10% of its $1.2 billion in sales 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 birthrate in the United States has left Gerber, which markets more than 250 varieties of baby food, struggling to boost sales and profits. Analysts said its baby food volume declined 2% last year, and the company launched a reorganization to cut operating costs.

With birthrates dropping as “the thirtysomethings turn into fortysomethings, Gerber needs to be more global to grow, and Sandoz will help them be more global,” McMillin said.

“Joining with Sandoz provides us with opportunities for dynamic growth in a much shorter time horizon and with the necessary infrastructure already in place in most major markets,” said Gerber Chairman and President Alfred Piergallini.

Sandoz is one the largest pharmaceutical companies in the world, selling a wide variety of prescription drugs and over-the-counter products, including Triaminic cough syrups, TheraFlu and Ex-Lax. However, more than 10% of Sandoz’s $10.3 billion in sales last year came from its health-related foods group, which is also its fastest-growing division.

“Gerber’s position in North America strengthens our existing base of nutrition products there,” said Rolf Schweizer, chief executive of Sandoz. “Gerber provides synergies for Sandoz with advanced technologies in processing and packaging which we can apply in Europe and the Far East.”

Sandoz said current Gerber management would run the company as a separate subsidiary after the acquisition, which is subject to shareholder and government approval.

Founded originally as a small fruit and vegetable canning company, Gerber entered the baby food business in 1927 when the daughter-in-law of company co-founder Frank Gerber suggested selling prepackaged, strained baby foods. Until then, most baby food was cooked, mashed and strained at home.

Gerber on Monday reported that its fourth-quarter profit for the three months ended March 31 tumbled to $25.6 million from $40.6 million a year earlier. The company blamed much of the drop on restructuring costs.

Baby Food Maker Turns Swiss

Sandoz Ltd., a large Swiss-based pharmaceutical company, is buying Gerber Products, the world’s No. 1 maker of baby foods.

SANDOZ

Headquarters: Basel, Switzerland Businesses: Drugs, nutritional foods, industrial and agricultural chemicals, seeds. Makes Ovaltine, Wasa crackers, Isotar sports drink (dominant in Europe). Big-selling drug Sandimmum, introduced in 1982, prevents the body from rejecting organ transplants. Employees: 54,000 Annual sales: $10.6 billion for fiscal year ended March 24, up 5%. Annual profit: $1.2 billion, up 14%

GERBER

Headquarters: Fremont, Mich. Businesses: No. 1 baby food maker, with 70% market share; infant apparel; life insurance. Employees: 12,000 Annual sales: $1.17 billion for fiscal year ended March 21, down 8% from previous year, which included Buster Brown. Annual profit: $113.63 million, up 16.7% from previous year profit (reduced by accounting rules changes).

The deal at a glance

* Sandoz to pay $3.7 billion, or $53 per share, a 53% premium over Gerber’s closing price Friday.

* Gerber gets international marketing expertise without significant new costs.

* Sandoz gets significant U.S. expansion and growth of nutrition business.

Source: Sandoz, Gerber, Hoover’s Handbook