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Danone Buys WhiteWave: Simply a Billion-Dollar Organic Acquisition

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Globally, Danone is essentially known for its number one position in the dairy market and being the brand owner of the natural mineral water signature brand Evian. Unsurprisingly, most consumers may have little knowledge about Danone’s hot pursuit for a share of their “organic stomach”, “organic wallets” or “organic shopping baskets”. In Danone’s latest annual report, the specific word “organic” was rarely mentioned and no specific strategy as to how to develop organic businesses has been outlined in the public domain. However, Danone audaciously stated that it had the ambition to become a global leader for healthy and sustainable eating and drinking. Thus far, organic farming as a sustainable farming model is far from mainstream agricultural practice, however, organic produce, which commands a price premium in many markets, is considered to offer a sustainable consumption option, which fits exactly with Danone’s long-term vision as stated. The pending acquisition of WhiteWave will allow Danone to immediately accelerate its journey towards strong sustainability and profitable growth by 2020. So, what’s the fuss about Danone’s underlying “organic initiatives”?

World, Organic, Packaged Foods and Beverages, Selected Companies' Sales, US$ mn RSP, 2015
Company US$ mn RSP
WhiteWave Foods Co 1194
Hain Celestial Group Inc 1010
Hipp GmbH & Co Vertrieb KG 591
Inner Mongolia Yili Industrial Group Co Ltd 577
China Mengniu Dairy Co Ltd 536
General Mills Inc 282
Danone, Groupe 245
Lactalis, Groupe 231
Nestlé SA 139

Note: Euromonitor International Health and Wellness Database

WhiteWave – global organic leader

The WhiteWave deal is estimated to be worth around US$12.5 billion, including debt and certain other WhiteWave liabilities. Its price represents a premium of approximately 24% over WhiteWave’s 30-day average closing trading price (US$45.43). The transaction is expected to close by the end of 2016, subject to the approval of WhiteWave’s shareholders, regulatory approvals, and customary conditions. WhiteWave is a global company which generated US$4 billion in net sales in 2015 and has a large product portfolio in North America and Europe in high-growth food and beverage categories, including a focus on premium organic dairy, non-GMO, plant-based alternatives to milk and yoghurt, fresh foods, and coffee creamers. According to WhiteWave’s presentation at a recent Consumer Conference, plant-based foods and beverage net sales reached US$920 million and US$533 million, for the Americas and Europe, respectively, in 2015. Our Ethical Labels database forecast that combined retail sales of food and beverages carrying GMO Free labels will see absolute growth of US$1.5 billion over 2015-2020 within the 26 researched countries. The GMO Free label is an increasingly desirable option for the sake of transparency and responsibility for consumers.

Our Health and Wellness database shows that WhiteWave led the global organic packaged foods and beverages market with retail value sales of US$1.2 billion compared to the second placed Hain Celestial, with US$1 billion, in 2015. By contrast, Danone’s organic sales amounted to US$244 million globally, meaning the pickup of WhiteWave would instantly uplift Danone’s profile in the global organic arena. Although the deal will be 100% debt financed, which may affect Danone’s future financial capability to chase other big deals in the short to medium term, from a market share point of view, Danone will command over 8% of the organic category in the US. This is a comfortable lead in the US’s highly fragmented organic market, with numerous small players scattered around the country. Furthermore, our database forecasts that the US will fetch a net increase of US$2.6 billion over 2015-2020, that said, through WhiteWave, Danone place itself in a good position to capture the organic boom in the next few years if things go as planned.

Danone and WhiteWave’s joint press release stated that Danone will have significant opportunities to support WhiteWave’s continued growth, while also realising significant sales growth and cost synergies. Danone expects the transaction to be solidly accretive to Danone’s earnings within the first year after closing and to be above 10% accretion based on expected run-rate synergies. The transaction is expected to result in approximately US$300 million of EBIT synergies by 2020.

According to our packaged food and soft drinks databases, Nestlé and Danone are arch rivals in the global food and beverage markets. Comparatively, Nestlé is a much smaller player in the organic field, with global sales of around US$140 million in 2015. Statistically, if Nestlé seriously wishes to take on Danone, the Swiss firm would have to acquire several medium-sized players, such as Hipp GmbH & Co Vertrieb KG and Amy's Kitchen Inc; or, it would be wise to set its sights on Hain Celestial. Thus far, there is no sign Nestlé will join Danone’s organic pursuit, perhaps due to other businesses development commitments.

Danone - China Mengniu strength

Over the past two years, Danone has been actively investing in China’s dairy assets through joint ventures and collaboration with other major players. Unknown to many analysts, this is actually an investment directly and indirectly in organic businesses.

Inner Mongolia Mengniu Dairy Industry (Group) Co Ltd is listed on the Hong Kong Stock Exchange. China’s state-owned company China National Cereals, Oils & Foodstuffs Imp & Exp Corp (COFCO) is its largest shareholder, with Danone becoming its second-largest shareholder in 2014 due to enlarging its share from 4% to 9%. COFCO, Danone and Arla have collaborated to create the joint venture COFCO Dairy Investments Ltd, which holds almost a 32% share in Inner Mongolia Mengniu Dairy Industry in total, with COFCO and Arla holding 16% and 5% shares, respectively.

2014 also saw the launch of a joint venture between Inner Mongolia Mengniu Dairy Industry and Danone, called Inner Mongolia Mengniu Danone Dairy Co Ltd which operates the chilled dairy businesses of each company. Mengniu and Danone hold 80% and 20% shares, respectively. According to Mengniu’s 2015 annual report, the Mengniu Danone joint venture commenced operations fully in that year. In 2016, Mengniu Danone continues to lead chilled dairy products in China, maintaining high sales growth and ranking first in terms of market share. In 2015, Mengniu Danone further integrated the advanced technology and professional expertise of Danone Group. A notable example is the Ma’anshan plant passing the global operation standard inspection of Danone Group. Also, for the first time, Danone Group has led a pilot technical capacity match project and career planning project for technical personnel.

According to Euromonitor International’s Health and Wellness database, China has a highly consolidated organic packaged food and beverage market, with the top three players accounting for over 80% combined retail value sales in 2015. Mengniu ranked second in China’s overall organic sales, with a share of 32%, closely following Inner Mongolia Yili Industrial Group Co Ltd’s 35%. China is set to see absolute growth of organic retail value sales of around US$2 billion in 2015-2020, which means Danone’s direct or indirect investments in an organic player Mengniu will potentially yield good return in the next few years.

In summary, Danone has made calculated organic moves in two of the world’s major organic growth markets – the US and China. This is not purely coincidence, instead, it perfectly matches its long-term corporate vision to generate sustainable and profitable growth. And, organic is one of the topical sustainable options and the business is potentially profitable.

Passport Ethical Labels is our brand new research database created in response to the growing movement towards sustainability, social responsibility and transparency on labels. It is the first comprehensive quantitative and qualitative, fully transparent system, translating social and ethical concerns into business opportunities.

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