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Pfizer's $11.85B Deal a Baby Step in Drugs Refocusing (Update 1)

Updated to reflect analyst comments and additional data throughout

NEW YORK (TheStreet) -- Pfizer (PFE) has sold its baby nutrition unit to Nestle for $11.85 billion, slightly more than previous reports indicated, as continued divestitures including an initial public offering of its animal health business loom.

For Pfizer, the world's largest drug maker, and Nestle, the leading maker of baby foods, the deal represents an increasing focus by both companies on their core businesses. The sale also represents one of Pfizer's biggest-ever divestitures and its largest step in rationalizing its non-pharmaceuticals businesses in a plan to focus on its drugs unit as some blockbusters, like Lipitor, go generic.

For Pfizer CEO Ian Read, Monday's deal marks his biggest step since taking over as CEO and announcing a plan to shrink the drugs and health products giant. After previous reports that Danone or Mead Johnson (MJN) would be interested in Pfizer's baby foods unit, Monday's sale price of $11.85 billion in cash also exceeds those reports by roughly $2 billion.

For Switzerland-based Nestle, the move may help the leading baby foods seller add to its China-based revenue, while raising its infant formula sales to roughly $7 billion from $5 billion. Although Nestle tops overall baby nutrition sales, it's in eighth place in China, according to Euromonitor data. That data shows that the Pfizer business its acquiring have a stronger presence in Asia, the Middle East and Aftica, providing what could be an inroad for Nestle into fast growing markets.

In reaction to the deal, analysts keyed in on the higher than expected price of the sale. At a price of 5.5 times expected 2012 sales, "this multiple is at the upper range of the bids recently quoted in the press and in our view reflects the quality and scarcity value of the asset," wrote Bank of America Merrill Lynch analyst Gregg Gilbert in a Monday note to clients. Gilbert estimates that Pfizer can use the cash from the sale to increase buybacks, in a move that will add roughly 4% to the company's 2013 earnings per share. He rates shares a "buy" with a $25 price target.

"The sale of the Nutrition business to Nestlé is consistent with Pfizer's intention to generate the greatest value for shareholders by maximizing the value-creation potential of our businesses and prudently managing our capital allocation," said Read in a statement. "We remain focused on enhancing shareholder value and, following the completion of this divestiture, we expect to allocate the after-tax proceeds to further share repurchases, or invest in other business-development opportunities, with the return on share repurchases remaining our case to beat."

Gilbert of Bank of America noted that if the animal health unit were to be divested at a similar price-to-sales multiple, it could add a further 7% upside to Pfizer's 2013 EPS -- higher than his previous estimates in the 3% to 4% range if a divestiture were valued at $16 billion. "[Pfizer] has a number of catalysts in 2012 that have the potential to significantly influence its valuation," wrote Gilbert, citing the animal health unit sale, FDA action on a stroke prevention drug called Eliquis and the possible approval of tofacitinib for rheumatoid arthritis.

Earlier in April, The Wall Street Journal reported that Pfizer may hire JPMorgan, Bank of America and Morgan Stanley to lead an initial public offering of its animal vaccine and drug unit as early as this summer.

In response to an April query from the TheStreet following the Journal reports of possible baby formula and animal health deals, a Pfizer spokesperson said, "With respect to the Animal Health business, we believe that a public transaction is most likely. That said, no decisions have been made at this point."

The spokesperson added in the emailed statement, "We view the future of Pfizer as a company with 2 distinct biopharma businesses along with a Consumer products businesses: 1. The Innovative Core and 2. Established Products."

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