Potential Takeover of Danone by Kraft Heinz (KHC) Makes Sense on the Surface, But a Deeper Look Suggests a Deal is Unlikely - Credit Suisse

August 21, 2017 7:21 AM EDT
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Credit Suisse analyst Robert Moskow weighed in on speculation Danone might be takeover bait for Kraft Heinz (NASDAQ: KHC) amid pressure from shareholder activists. Moskow views a potential acquisition as accretive for Kraft Heinz although unlikely.

Moskow said on the surface Danone appears to check all the boxes of a Kraft Heinz deal: 1) leading brands in growth categories; 2) international expansion; and 3) opportunities for cost savings and scale. In addition, a geographic and category overlap analysis by the firm showed a merger would create savings in-line if not higher than the 7% of sales that 3G initially expected when it bought Heinz and Kraft. Even after assuming a major 40% deal premium, they calculate 7% EPS accretion before synergies and an astonishing 31% after.

On the political side of the deal equation, the analyst notes that Marc Ferracci, a close economic advisor of French President Emmanuel Macron during the Macron campaign, implied a willingness to stand aside in the event of an unsolicited approach for the company. However, now that he is in office, Macron needs political capital to institute labor reforms to improve France's competitiveness. "The prospect of a US-based company with a reputation for savage job cuts absconding with a “national jewel” like Danone would likely cause an outrage in the French media," Moskow comments. "Even activist investor Corvex, which took a $400 million stake in Danone, does not appear to assume a take-out in its investment thesis."

Moskow said getting Danone to the table might prove as hard if not harder for Kraft Heinz than the failed attempt to engage Unilever. "Danone undoubtedly would insist on years of job protection for Danone employees and the Paris headquarters, seats on the board, a big equity stake, and perhaps top billing in the name of the new company," he said. "In addition, Kraft Heinz would have to make a credible commitment to the company's mission as a public-benefit corporation to produce intrinsically healthy products for consumers in an environmentally sustainable way."

In addition, with Danone's underlying growth rate slowing to less than 1% in the first half of the year, it would not provide the boost Kraft is looking for. "Commoditization of the yogurt category in Europe, volatility in the Chinese infant formula market, deceleration in Danone’s Chinese beverage brand Mizone, and heightened competition in U.S. plantbased beverages have severely denuded the top-line," the analyst commented. "What’s more, the rate of change in health-based U.S. categories like yogurt and plant-based beverages has accelerated to a “tech industry” pace. Kraft Heinz does not have the innovative spirt or the expertise to stay ahead of these trends."

Overall, the analyst concludes while Danone fits Kraft Heinz’ acquisition criteria in many ways, they don’t see a clear path to a mutual agreement. They continue to believe Mondelez (NASDAQ: MDLZ) makes the most sense for Kraft Heinz.

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