Danone is in talks with Nestlé and other potential buyers over the disposal of most of its medical nutrition division, as it eyes an expansion of its baby food business.

The French group, which is being advised by JPMorgan, stands to raise up to €5 billion from a sale, analysts said. Danone could then spend the proceeds on acquisitions of other infant formula producers.

The disposal talks are being held with a number of interested parties, but are not at an exclusive stage and may yet break down on price, the people added. Danone, JPMorgan and Nestlé declined to comment.

A sale would allow the Paris-based group to exit a niche, prescription-based business in which it has struggled to connect with consumers, and focus on mounting a challenge to Nestlé in infant nutrition.

The Swiss food group is the market leader in baby milk powder, with a 27 per cent share, against Danone’s 15 per cent. Bankers and analysts have long mooted a tie-up between Danone and Mead Johnson, the US group that is the world’s third-largest baby food company, with an 8 per cent share. However, they have warned this would stretch Danone financially.

“We estimate Mead would cost €15 billion,” said analysts at Credit Suisse. “This price tag may require equity financing, unless Danone finds a partner for the US business.”

Infant allergy products are excluded from the sale, people close to the talks said – which may prove a stumbling block, as food intolerance products are an attractive part of its medical nutrition portfolio.

Its Neocate brand for children with cows’ milk allergies, for example, has global rollout potential but currently only has a significant presence in Finland and Denmark, according to Euromonitor. Medical nutrition is the smallest of Danone’s four main businesses.

– (Copyright The Financial Times Limited 2014)