Some consumer groups naturally create value. Others have value creation thrust upon them. Take Danone and Kraft. The French dairy group’s shares have almost doubled in the last three years, as it has disposed of weaker brands and grown its margins. Kraft’s shares, meanwhile, have risen just 5% on an annualized basis since 2001. With activist shareholder Nelson Peltz, who owns a 3% stake in the group worth around $1.7billion, now on its books, Kraft is reportedly talking to Danone about buying its biscuits and cereals unit in a bid for growth. It’s clear which party has the upper hand.
Danone is in a sweet spot thanks to consumers’ growing taste for its “probiotic” yoghurts and mineral water brands. Selling biscuits doesn’t really fit with that healthy image. If Danone disposed of its snacks brands it would be left a lean pure play in beverages and fresh dairy—the fastest growing food and drink categories, according to AC Nielsen data.
Danone’s biscuits should make around €400 million of Ebitda (earnings before interest, taxes, depreciation and amortization) in 2008. Danone’s biscuits margins have grown from 8.7% to 13.7% since 2000. The other divisions, including yoghurt and water are growing faster, however. Beverages grew 15% in 2006 and fresh dairy products 9.2%, compared to biscuits and cereal at 3.1%. On the sector average of 10 times Ebitda, a sale could raise €4 billion.
There’s no sign that Danone is neglecting its other businesses through hanging on to its biscuits. But selling now would put it in an ideal position to talk tough on price. Kraft, the mooted buyer, is under pressure to create value now Peltz has emerged with a 3% stake.
Taking Danone’s biscuit business would give the US food giant a considerable presence in Europe. And while that won’t make Kraft’s sugary brands healthy, it will give them a crack at growth.
Danone might even unlock some more value. Say it got €4 billion for its biscuits. The rest of the business might command a rating of 13 times Ebitda, in line with fast-growing rival Numico, valuing it at €32 billion. Deduct €6 billion for debt, minorities and other odds and ends, and the remaining business is worth €64 a share—7% more than Friday’s close. Who knows—if France takes yoghurt off the list of protected industries, former suitor PepsiCo might even return for a second look.