Nestlé has transformed itself over the past five years from a bulk processor of basic foods, such as milk and cereal, into a firm focused on high-tech, healthy foods. The firm insightfully predicted the rise in the healthy eating and functional food categories and has carefully reshaped its product portfolio to cater to these trends. Not only has this approach boosted sales but it has also shielded the firm from rising commodity costs, which have hit margins at many of the firm's selling products with less added value.

Many analysts are currently talking up the prospect of Nestlé using the Alcon money to launch a takeover of French cosmetics firm L'Oréal, in which it currently holds a 29% stake. This speculation has been partly prompted by the fact that a shareholder agreement that prevents the Bettencourt family selling their 30% stake in L'Oréal expires in April 2009. This speculation caused L'Oréal's share price to spike upwards by 5%; however, in BMI's opinion L'Oréal does not fit neatly with Nestlé's current strategy and is unlikely to be the motivating factor behind the sale of its shares in Alcon.

L'Oréal does not sit very easily with the Nestlé's focus on health and well-being, and although L'Oréal's revenues have moved steadily upwards in the past three years, BMI believes that astute acquisitions in the health and functional food categories are likely to offer more dynamic growth. U.S. based baby-food firm Mead Johnson, Russian dairy and beverage firm Wimm-Bill-Dann and Chinese dairy firm Mengniu have all been looked at by Nestlé in the past and may come under renewed scrutiny now that the firm has the money to fund large takeovers. With the additional benefit of operating in high-growth emerging markets, Wimm-Bill-Dann and Mengniu would be BMI's early favorites.

From the April 14, 2008, Prepared Foods e-Flash