Danone sells its biscuit and cereal products business to Kraft
In July, U.S. food giant Kraft, which had recently been spun off by cigarette maker Philip Morris (now Altria Group), offered to buy Danone’s biscuit unit for USD 7.2 billion (EUR 5.3 billion) in cash.
Before entering into a definitive deal, Danone, under French law, must consult with its Works Council, it was reported. The acquisition, subject to customary closing conditions, including regulatory clearances, is anticipated to be complete by the end of the year.
Analysts were of the opinion that Kraft would be interested in acquiring all of Danone, but because of its size and the possibility of being outbid by other companies, acquiring just the cookies business seemed to be the only viable option.
Kraft Foods’ bid includes Danone’s market-leading biscuit brands, such as LU, Tuc and Prince, as well as operations and assets in 20 countries, including 36 manufacturing facilities. However, the deal excludes Danone’s joint ventures in Latin America and India.
Following the purchase, the European headquarters of the biscuit business will remain in the greater Paris metropolitan area for the foreseeable future. According to reports, Kraft has already made it clear that it does not intend to close any of the Danone biscuit manufacturing facilities in France for at least three years after the agreement is signed.
Frank Riboud, CEO of Danone, has been as desperate to sell his biscuits division as Irene Rosenfeld, Kraft’s CEO, was desperate to buy them. According to the London newspaper The Economist, sales of Danone’s cookies and crackers in 2006 grew by just 3.1 percent, compared with 9.2 percent for dairy products and 14.8 percent for bottled water, Danone’s two other product lines. Nor do biscuits fit with the company’s newly-found hyper-healthy image. Danone once was heavily diversified, dabbled in glass, ready meals, beer and confectionery. But concentrating on fewer lines—dairy products and mineral water - and making each of them number one or two worldwide has driven its resent success (read has kept the takeover wolves at bay).
Kraft, meanwhile, has been coerced into international expansion, not least since Nelson Petz, a so-called “activist investor”, bough 3 percent of Kraft’s shares. That put the heat on recently appointed Ms Rosenfeld to expand into faster-growing markets abroad, to sell underperforming operations and to increase the firm’s leverage. The maker of Oreo cookies, Philadelphia cream cheese and Post cereals is the leader in four-fifths of its markets in America, but in Europe and Asia it is much weaker.
Danone’s biscuit and cereal products business, with about 15,000 employees worldwide, generated revenues of EUR 2.0 billion or USD 2.7 billion in 2006, while EBITDA was EUR 390 million or USD 525 million for the year.
Commenting on the deal, Irene Rosenfeld, reportedly said: “This proposed acquisition makes great sense for Kraft. It will increase our presence in snacks - our fastest growing global segment - and transform our international business. This growing, high-margin business will give Kraft another core growth category in Europe, a cornerstone for faster growth in emerging markets, and the best portfolio of iconic biscuit brands in the world.”
Kraft Foods is one of the world’s largest food and beverage companies, with annual revenues of more than USD 34 billion. Kraft markets a broad portfolio of iconic brands in 155 countries, including seven brands with revenue of more than USD 1 billion.
The acquisition of Danone business will result in expanded operating scale and additional global reach for Kraft, especially into important emerging markets, such as China, Russia, Poland, Indonesia and Malaysia that account for over 25 percent of Danone’s biscuit business. In China, Kraft will double the size of its business, while it will gain entry into the biscuit category in Eastern Europe, notably in Russia, where Danone is the category leader. With the purchase, Kraft also will establish footholds in Malaysia and Indonesia.
What will Danone do with Kraft’s money? It will make acquisitions, says Mr Riboud, but they will not necessarily be the ones that everyone expects. Analysts and investors had pegged Numico, a Dutch firm that makes baby food (the Milupa brand); Yakult, a Japanese yogurt-maker, and Wimm-Bill-Dann, a very colourful Russian outfit that produces dairy products and juice. Although Wimm-Bill-Dann was considered the most likely target, given its fit with Danone’s existing products and its stated desire for “extreme focus”, it was Numico that Danone announced it would buy for EUR 12.3 billion.
Danone said it will offer EUR 55 per share in cash for each share held in the Dutch firm. The offer price represents a 44 percent premium to Numico’s closing share price over the past three months. The deal is expected to be completed by October this year, the two companies stated. Meanwhile, news agency Bloomberg quoted several analysts as saying that the price being paid by Danone for Numico was too high.
