By Freya Berry and Martinne Geller
LONDON (Reuters) - Nestle is in "advanced discussions" to merge its international ice cream business with R&R Ice Cream, the world's biggest packaged food firm said on Monday, as it focuses more closely on its higher-performing brands.
Earlier, 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 (£2.2 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, which will be equally owned by both parties.
The mass-market ice cream segment is under pressure as consumers shift preferences towards healthy, fresh food or premium brands. Nestle's global share of the market is 10.8 percent, down from 12.8 percent in 2010. It is now less than half that of rival Unilever (LONDON:ULVR), according to Euromonitor. R&R has a market share of 0.8 percent.
Nestle's ice cream business includes its own brand Nestle and Movenpick. Its ice cream operations in the United States will be excluded from the deal.
The new partnership will combine R&R's manufacturing model with Nestle's distribution network. It will operate in over 20 countries and employ more than 10,000 people.
Terms of the deal and its advisors were not disclosed. But a source familiar with the matter previously told Reuters that Credit Suisse (SIX:CSGN) 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.
The joint venture will be composed of senior executives from both companies and chaired by Luis Cantarell, Nestle's executive vice president for EMEA.
"(The structure) is a way to see how the business develops and not to focus so much on it internally," said Jon Cox, analyst at Kepler Cheuvreux.
MARKET OPENS UP
Together, Nestle and rival Unilever control about a third of the $67 billion global ice cream market, but changing tastes have increased competition and opened up the ice cream market to smaller players.
Nestle oversees a sprawling portfolio including Gerber baby food, Nescafe coffee, KitKat bars and Purina pet food. But recent economic weakness around the world has clipped its overall growth rate, although its size and diversification has helped it weather the downturn better than some rivals.
Still, Nestle, like Unilever and Procter & Gamble, 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 conducting similar transactions for its U.S. frozen food division, which is its second-largest business in the country, behind pet care. The company estimates the frozen food category, which includes brands like Stouffer's and Lean Cuisine, has been declining annually at an average rate of 2 percent in recent years.