Danone drove deeper into the fast-growing Russian dairy market Friday, announcing plans for a merger with Unimilk that could pave the way for more consolidation in the European food sector.
The world's largest yogurt maker said the new entity would have about 21 percent of the Russian dairy market, which will become Danone's second-largest, and lead sales in the Commonwealth of Independent States.
The combination of the two companies' fresh dairy business in Russia, Ukraine, Kazakhstan and Belarus would have annual sales of about 1.5 billion euros ($1.8 billion). Danone will hold 57.5 percent and Unimilk 42.5 percent.
"The CIS is a group of countries where the potential penetration and growth of the category both in terms of volume and value … is among the most significant," Danone Finance Director Pierre-Andre Terisse said.
Danone, meanwhile, will rethink its options for its 18 percent stake in Russian juice and dairy maker Wimm-Bill-Dann, Terisse told a conference call with analysts. Wimm-Bill-Dann said separately that it was ready to buy the stake.
Danone, whose last transformational deal was the 12.3 billion euro purchase of the baby and medical nutrition business of Dutch rival Numico three years ago, made no secret that it was looking at acquisitions.
But it had pointed to expansion via small bolt-on deals in dairy, medical nutrition, baby food and in emerging countries.
Fitch Ratings said in a note that the Danone deal indicated "the potential for further consolidation in the European packaged-food industry, driven by a need to generate growth and gain cost efficiencies,"
"The pace of M&A activity in the sector accelerated late in 2009 and into 2010," said Philip Zahn, Senior Director in Fitch's Retail and Consumer Products team.
"This will likely continue, with the larger, higher-rated packaged-food companies with strong access to the capital markets leading the industry's consolidation. Given that the larger food companies are already highly diversified, most transactions will be of a "'bolt-on' nature rather than being transformational," he added.
The purchase, scheduled for completion in the fourth quarter, will increase the percentage of sales Danone gets from emerging markets to 46 percent from 42 percent, the company said. It should add 0.5 to 1 percentage point to Danone’s total annual sales growth, Terisse said.
“The potential is huge,” said Jean-Marie L’Home, an analyst at Aurel, estimating sales growth of as much as 20 percent over the next four years. Danone-Unimilk will be the biggest Russian dairy company, with its market share at 21 percent, he said.
The deal would increase Danone's net debt by 1.3 billion euros, mainly because of put options given to Unimilk shareholders allowing them to dispose of part or all of their shares in the new entity, Danone added.
Danone will inform investors about whether it will start a buyback program in the second half, and the company could repurchase as much as 500 million euros of stock, Terisse said.
Terisse said the potential for fresh dairy products in Russia and the CIS countries was very high.
The two groups' geographical presence, product ranges and distribution networks are complementary, he added.
In a research note, Oddo Securities analysts said the deal was "a strategically interesting merger for a limited price," giving Danone's scale in a key emerging market.
Danone generates more than half of sales from its dairy business.
Oddo Securities added: "The success of Danone in Russia in fresh dairy products had already significantly reduced the need for their [Wimm-Bill-Dann] stake, and with Unimilk we can consider that Danone is clearly on its way out."
The Unimilk deal will initially negatively impact group margins because of Unimilk's low profitability, Terisse said.
"The merger will, however, generate significant synergies, and the joint venture is expected to reach the current level of operating margin of Danone Russia within three years, that is by 2013," he added.
Unimilk posted sales of 969 million euros in 2009, Danone said in a presentation. It has 28 production facilities operating across Russia, Ukraine and Belarus.
Danone-Unimilk’s chairman will be Andrei Beskhmelnitsky, who is chief executive of Unimilk. Filip Kegels, who heads Danone Fresh Dairy Products in Eastern Europe, will take charge of operational management of the entity, according to the statement.
(Reuters, Bloomberg)
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