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Nestle, the world's largest food company, faces increasing pressure to buy another nutrition company or break up as consolidation in the food sector intensifies.
Nestle has been shoved unwillingly on to the dance floor by a report that it has held exploratory merger talks with US snack and soft drink giant PepsiCo, a scenario Nestle immediately downplayed.
But with the merger music playing non-stop in the food sector, Nestle may not be able to sit on the sidelines.
"For the first time Nestle is seen by the market as a possible target," said European food sector analyst Jon Cox at Kepler Equities in Zurich.
Analysts say it may need to bulk up through another takeover or face pressure to sell its massive holdings in companies like L'Oreal, the world's largest cosmetics firm, and Alcon, one of the world's biggest eyecare providers.
The stakes have a market value of a combined $52 billion ($66.41 billion) - and selling them would streamline the group's structure and allow investors to assign a higher value to its core food and nutrition operations.
Analysts say the markets have failed to reward the group for the value of its operations, which are increasingly focused on nutrition, which includes special diet and medical foods, baby food and other non-commodity items.
Nestle has a price/earnings ratio of 16.3 compared to 16.9 for Unilever, 18.3 for Danone and 17.1 for the companies of the DJ Stoxx European food index.
"If you put nutrition division only on three times sales, then that would put the remaining portions of Nestle only at 1 times sales, which we view as extremely cheap, so I do see where the breakup stories are coming from," said analyst Marco Gulpers at Dutch bank ING.
"Is a breakup of Nestle possible? In the current environment, this is not as far-fetched as it sounds," said Cox.
Nestle boasts a market capitalisation of $152 billion, but the breakup value of the firm is significantly higher - around $198 billion.
If L'Oreal and Alcon were sold and investors priced the remaining business according to sector averages, it would add around $45 billion to Nestle's value - 40 per cent more than the value of its food and beverage operations, Cox says.
Analysts at LGT Bank in Liechtenstein say speculation is increasing that Nestle could become a predator with an eye to taking over Anglo-Dutch group Unilever, the world's third-largest consumer goods maker.
Analysts say the food sector can look forward to a "summer of love", with speculation rampant that such unlikely bedmates as Danone and PepsiCo, or Nestle and Unilever, could pair off after yoghurt icon Danone agreed this month to pay around $17 billion for babyfood maker Numico.
Nestle has also already been quite active itself, splashing out $8 billion since December to buy the medical nutrition and Gerber babyfood divisions from Novartis.
"Merger speculation in this sector is now wide open," LGT said in a research note.
The main problem with such spin-the-bottle scenarios, however, is that Nestle is widely viewed as one of the best-run, profitable groups in the sector with a long track record of improving its profitability.
That makes analysts like Cox and Gulpers reluctant to subscribe to any wild merger or breakup scenario.
"I just think that Nestle itself is on a clear recovery track where they will increase margins to one of the highest in the sector," Gulpers said.
Nestle's efficiency drive has seen the group grow organically by 5.8 per cent a year and increase its gross margin by 300 basis points to 13.5 per cent over the 10 years to 2006.
This has helped it to deliver industry-beating improvements, according to a recent study by investment bank Dresdner Kleinwort.
"In the real world, Nestle is chugging along nicely," says Cox.
Nestle declined to comment for this report.
- REUTERS
