Nestle SA (NESN) and Danone SA (BN) made first- round bids for Pfizer Inc. (PFE)’s baby-formula unit, putting two of Europe’s largest food companies in competition for the division, people with knowledge of the matter said.

A tax-free spinoff is still an option for the company, said the people, who declined to be identified as the process is private. Pfizer had delayed sending out sale documents to examine whether that move would be better for investors, people with knowledge of the plans said in September.

Nestle had $8.3 billion in cash, cash equivalents and short-term investments as of June, more than twice as much as Danone’s $3 billion. The sale of the infant-nutrition business, whose revenue approached $2 billion in 2010, would allow Chief Executive Officer Ian Read to focus more on medicine development at Pfizer, whose drugs include the Lipitor cholesterol pill.

In addition to their cash, the companies’ investment-grade credit ratings may help them borrow funds for acquisitions. A representative for Vevey, Switzerland-based Nestle declined to comment, while two spokeswomen for Danone didn’t respond to requests for comment.

Many drugmakers are seeking fresh sources of revenue as their patents on top-selling drugs expire, allowing copycats to enter the market with cheaper generic versions. Through 2015, medicines that generate $171 billion in sales globally will lose patent protection, according to Gary Gatyas, a spokesman for IMS Health in Parsippany, New Jersey, which tracks the industry.

Lipitor Loss

Pfizer lost exclusivity on its Lipitor (PHAM1150) treatment in the U.S. last year. The company’s plan to shed its nutrition and animal health units is part of Read’s strategy to shield against the potential loss of more than $10 billion in sales from the cholesterol pill.

“The process of exploring strategic alternatives for Pfizer’s nutrition business is ongoing,” said Joan Campion, a spokeswoman for Pfizer. “We’re currently pursuing the activities associated with evaluating all options, including sale, spin-off or other transaction.” The company expects to announce a decision this year, she said.

Pfizer shares fell 0.4 percent to $21.90 at 9:55 a.m. New York time. Danone declined 0.9 percent to 47.13 euros in Paris, while Nestle slid 0.5 percent to 53.20 Swiss francs in Zurich.

Examining Options

Pfizer said in July that it would examine options for the operations, as well as the animal-health division. The New York- based drugmaker may fetch as much as $10.5 billion for the baby- food unit, the people said in July. Together, the two accounted for 8 percent of the drugmaker’s 2010 revenue.

“Investors will view this positively,” said Les Funtleyder, a health-care strategist and portfolio manager with Miller Tabak & Co. in New York, whose fund owns Pfizer shares. “The more capital return, the better,” he said of a potential sale.

Pfizer shares gained less than 1 percent to $21.99 yesterday. They have risen 20 percent in the past year.

Abbott Laboratories (ABT) said this week that it isn’t participating in the Pfizer process. The health-care company was among the parties that had expressed interest in the division, people with knowledge of the process said in July. The Abbott Park, Illinois-based company, which announced its own breakup in October, was still interested in bidding for the Pfizer unit then, said a person familiar with the matter.

Antitrust Concern?

Potential buyers, notably Nestle, may encounter antitrust issues in some markets, two of the people said. With the Pfizer operations, the Swiss food company would hold more than 60 percent of the market for baby formula in Australia, Mexico and elsewhere, they said. Danone would have as much as 80 percent of markets such as the U.K., Turkey and New Zealand and more than 70 percent in Ireland and Australia, said the people. Both companies could dispose of assets to meet antitrust requirements.

Pfizer gained the formula division through its $68 billion purchase of Wyeth in 2009. The unit, which makes the SMA Gold line of products for infants and children and Enercal supplements for adults, offers products in more than 60 countries, according to its website.

The nutrition business is ranked fifth worldwide by market share, according to Lee Linthicum, an analyst with Euromonitor International in London. That compares with the Middle East and Africa, and Asia, where it holds the No. 3 and No. 4 spots, respectively.

To contact the reporters on this story: Jeffrey McCracken in New York at jmccracken3@bloomberg.net; Jacqueline Simmons in Paris at jackiem@bloomberg.net; Drew Armstrong in New York at darmstrong17@bloomberg.net

To contact the editors responsible for this story: Jennifer Sondag at jsondag@bloomberg.net; Reg Gale at rgale5@bloomberg.net