Abstract

In this article, we analyzed the case of Danone acquiring Whitewave, based on the food industry trend and two companies long term mission; we identify the motivation of this acquisition, and check if it fit into these two companies strategy; we check the financial performance of these two company to validate if the expected 300 million Euro synergy gain make sense or not; we look into detail of some special terms in this acquisition to understand how the government regulation can impact acquisitions.

Food Industry Introduction

General Introduction

Food industry is a massive and complex industry with long history, modern industry development and globalurbanizationchange the old style food into modern style food—Packed food, the packed food consumption in one country reflects its economic development in a certain way, modern food industry re-defined human eat and drink habit, it generated lots of new catalog in human food, such as:

• Snack food

• Candy and Chocolate

• Alcohol and Beer

• Fast ready to eat food

• Packed raw food

• Milk and Dairy

• Water and beverage

Big Companies in Food Industry

In fortune 500, there are 15 companies are located in three industries (Beverage, Food Consumer Product, Food Production) can be treated as food industry, They are selected and listed in below table:

Source: Forbes 500

These companies can position themselves in FT500, thanks to their long history, strong brand, rich portfolio and international operation strategy. According to a research from McKinsey, we can see the main growth of Food Company was from portfolio momentum, but in recent years, the M&A activities also become a main driver for companies’ growth. Actually the activities of big food companies reflect this trend in their strategy, we will take Danone as example in this article to see how the company history is aligned with it acquisitions and so on.

Trend of Food Industry

In modern food industry, organic, health, nature is the key words, especially for international company, they need to ensure the sustainability operation and produce health product for its consumers. For example, the Carbonated Beverage gain less and less share of whole beverage market due to it unhealthy nature and image, current trend in beverage market is energy drink which can bring power to people. The organic is another trend in this market, especially in developed area, people are not satisfied with artificial plants and foods, and genetically modified food is very sensitive for people. Lots of Brand Companies released their organic brand or product series, even the price is higher than normal product, it still attractive to pioneer consumers.

Danone’s Road of Acquisition

Company Introduction of Danone

Dedicated to bringing health through food to as many people as possible, Danone is a leading global food company built on four business lines: Fresh Dairy Products, Early Life Nutrition, Waters and Medical Nutrition. Through its mission and dual commitment to business success and social progress, the company aims to build a healthier future, thanks to better health, better lives and a better world, for all its stakeholders—its 100,000 employees, consumers, customers, suppliers, shareholders and all the communities with which it engages.

Present in over 130 markets, Danone generated sales of €22.4 billion in 2015, with more than half in emerging countries. Danone’s brand portfolio includes both international brands (Activia, Actimel, Danette, Danonino, Danio, evian, Volvic, Nutrilon/Aptamil, Nutricia) and local brands (Oikos, Prostokvashino, Aqua, Bonafont, Mizone, Blédina, Cow & Gate).

In the stock market, Danone is very active, listed on Euronext Paris and on the OTCQX market via an ADR (American Depositary Receipt) program, Danone is a component stock of leading social responsibility indexes including the Dow Jones Sustainability Indexes, Vigeo, the Ethibel Sustainability Index and the FTSE4Good Index.

Danone Evolution Journey

After going through the 60 years history of Danone, to summary the sold/divide/acquisition history of Danone, we list some major milestones in below table:

Going through the table we can find that Danone sold out the “Biscuit” and “Beer” business to make himself more focus on dairy. Baby food and medical; following the same strategy, Danone acquired Unimilk, Fan milk to strength it Dairy business, (Do not forget the Joint Venture in China with the biggest dairy company in China MengNiu), acquired Numico to strength its baby food business, acquired Numico and Wockhardt group’s nutrition activities to build up its nutrition business, step by step, become more and more strong in health and nutrition food and drink industry.

Company Introduction of WhiteWave

General Introduction

The WhiteWave Foods Company is a leading consumer packaged food and beverage company thatmanufactures, markets and sells branded plant-based foods and beverages, coffee creamers and beverages, premium dairy products and organic produce. It sells products primarily in North America, Europe and through a joint venture in China.

WhiteWave is focused on providing consumers with innovative, great-tasting food and beverage choices that meet their increasing desires for nutritious, flavorful, convenient, and responsibly-produced products.

The Company’s widely-recognized, leading brands distributed in North America include Silk®, So Delicious® and Vega™ plant-based foods and beverages, International Delight® and LAND O LAKES®* coffee creamers and beverages, Horizon Organic® and Wallaby Organic® premium dairy products and Earthbound Farm® organic salads, fruits and vegetables. Its popular plant-based foods and beverages brands in Europe include Alpro® and Provamel®.

Company History

The company was formerly a subsidiary of Dean Foods, and was spun off in an IPO announced in August 2012. WhiteWave acquired Earthbound Farms, America’s largest grower of organic produce, on Jan. 2, 2014, for approximately $600 million. In September 2014 WhiteWave announced they were taking over vegan dessert and beverage company, So Delicious. Whitewave announced in 31 October 2014 the So Delicious take over was complete. On July 7, 2016, French food and beverage manufacturer Danone announced a $12.5 billion deal to acquire WhiteWave.

The Acquisition

Summary of Danone Acquisition of WhiteWave

July 7, 2016, the first official announcement is released, as above article showing, both parties expressed their cooperative willingness and expectation of the good outcome.

On 4 October, 2016, White Wave board after a meeting confirmed that the takeover bid be accepted.

October 25, 2016, the successful launch of a 6.2 billion euros multi-tranche bond issue in euros. The 6.2 billion euros raised will enable Danone to finance part of the acquisition of The WhiteWaveFoods Company (« WhiteWave ») and to reduce the amount of the bridge loan that was contracted in July 2016 from its main banks, after settlement of the bond issue.

On October 26, 2016, Danone announced the successful launch of a 5.5 billion dollars bond issue, in 4 tranches of 3 to 10 years. This bond issue was carried out by way of a private placement reserved for institutional investors only (including qualified institutional buyers in the United States). Together with the 6.2 billion euros bond issue under the EMTN program announced on October 25,2016, this 5.5 billion dollars private placement will enable Danone to completely refinance the acquisition of The WhiteWave Foods Company (« WhiteWave ») after settlement of the bond issues.

March 31, 2017, Danone announced it had reached an agreement with DOJ concerning its WhiteWave transaction for $12.5 billion.

April 6th, 2017 — Danone is pleased to announce that the U.S. District Court for the District of Columbia issued an order on April 5th which will allow for the completion of the company’s acquisition of WhiteWave.

April 12th, 2017 — Danone is pleased to announce that it has today completed its acquisition of WhiteWave. So what happened on this day?

a) White WhiteWave shareholders will receive $56.25 per share in cash.

b) WhiteWave common stock has ceased trading prior to market opening today and will be delisted from the New York Stock Exchange.

c) Danone and WhiteWave will now combine their activities in North America to operate as a Strategic Business Unit, named “DanoneWave”.

So till this day, the whole acquisition progress is done, it last for 4 months and 5 days.

When first official announcement released, under the definitive merger agreement, Danone will acquire WhiteWave for $56.25 per share in an all-cash transaction, representing a total enterprise value of approximately $12.5 bn, including debt and certain other WhiteWave liabilities. The transaction has been unanimously approved by the Board of Directors of both companies. Its price represents a premium of approximately 24 percent over WhiteWave’s 30-day average closing trading price ($45.43). For sure this is not a hostile takeover, it is more like a strategic cooperation which has already prepared for long time.

Financial Analysis

Danone is a company size as revenue (2016) 21.9 billion Euro and WhiteWave is company size as revenue (2016) 4.2 billion dollar. For sure if we compare the size of company, Danone is much bigger than WhiteWave, but if we check other indicators, we may see the value of WhiteWave. WhiteWave just been spun off from Dean Foods in 2012, check attached table to see the financial performance of this company, it maintenance 14% as the growth rate in the revenue, comparing with Danone, its growth rate 2016 vs 2015 is -2%, we will see in the next synergy gain charter, how Danone expect the net sales increase speed of WhiteWave will help on Danone overall company performance.

Check the Operating Profit Rate, it always stay around 14% in recent 5 years, while Danone’s OPR is 13.3%, this is within the average level of dairy industry and showing WhiteWave is a health company from profit point of view.

The Financial leverage ratios of WhiteWave in 2016 is 2.1 and actually is was increasing since it was spun off. After the acquisition, Danone need to take all the debt also. But when we check Danone’s debt rate, I think it is not a bad thing it take over a company who has certain debt, because Danone debt rate is very low.

How Danone Finance the Capital?

According to the release documents, we can see that Danone funded about all the 12.5 billion by issuing bond, this doubled Danone Non-Current Liabilities from 10,841 million to 21,705 million, and its capital leverage rate in 2016 was 1.65, it is still at the acceptable range, actually we can say Danone was too consecutive before if we take 2015 the capital leverage was just 0.86.

2-year tranche of 1.35 billion euros, at a floating coupon of 3 month Euribor +0.15%;

4-year tranche of 1 billion euros, at a fixed rate priced at mid-swap +0.28% (coupon of 0.167%);

6-year tranche of 1 billion euros, at a fixed rate priced at mid-swap +0.40% (coupon of 0.424%);

8-year tranche of 1.25 billion euros, at a fixed rate priced at mid-swap +0.50% (coupon of 0.709%);

12-year tranche of 1.6 billion euros, at a fixed rate priced at mid-swap +0.65% (coupon of 1.208%)

3-year tranche of 1.2 billion dollars, at a coupon of 1.691%;

5-year tranche of 800 million dollars, at a coupon of 2.077%; 7-year tranche of 1.5 billion dollars, at a coupon of 2.589%; and10-year tranche of 2 billion dollars, at a coupon of 2.947%.

According to above list, from 2017, Danone will start to pay interests for all the bond, it will certain impact the company’s cash flow. However the debt will become taxes shield and help Danone get better use of its net income to growth its business.

At another side, WhiteWave stock holders will receive all their pay in cash, and WhiteWave will be delisted on the stock market. Each share of WhiteWave common stock issued and outstanding immediately prior to the effective time of the merger will automatically be cancelled and converted into the right to receive $56.25 in cash, without interest, less any applicable with holding taxes. I think this is a very important point which made Danone can pay all by cash-no tax applicable.

The Involved Parties in This Acquisition

In the whole progress,Lazard provided financial advice to Danone, while Wachtell, Lipton, Rosen & Katz served as its legal adviser. Goldman Sachs was the financial adviser for WhiteWave, and Skadden, Arps, Slate, Meagher & Flom served as counsel.

The acquisition need to go through the WhiteWave and Danone shareholders meeting, the audit of European and U.S. related government department, such asAntitrust Division of the United States Department of Justice( “DOJ” ), most of the international acquisition in U.S. need to go through DOJ, actually, when we talk DOJ in this case, it reminds us another party named “Stonyfield”.

As part of the agreement in principle, in order to facilitate the prompt closing of the WhiteWave’s acquisition, Danone has decided to sell one of its U.S. dairy subsidiaries, Stonyfield, in the months following the closing of the acquisition of WhiteWave. Stonyfield generated approximately $370 million in turnover in 2016. The famous brand OIKOS was used by Danone for its Greek yogurt product, we do not know if still Danone holding this brand or not in the near future.

There is another invest bank showing their great insight of the food industry. And the invest banker also wanted to bring bidders into this acquisition at that time.Hudson Executive(Two JPMorgan veterans, Douglas L. Braunstein and James C. Woolery, started the activist investment firm Hudson Executive Capital) took a position in shares of the WhiteWave late 2015 and continued to build on that investment, reaching a $32 million stake as of the end of March, according to data from S&P Capital IQ. WhiteWave agreed to be acquired for $10 billion by the French food company Danone. For the activist firm, the deal yielded an estimated 45 percent gain compared to where the average shares traded when it first invested last fall. But behind the scenes, Hudson Executive bankers urged WhiteWave’s chairman and chief executive, Gregg L. Engles, to solicit potential buyers, believing that WhiteWave would make a natural acquisition target for food giants like Coca-Cola or PepsiCo, according to a person briefed on the matter who asked not to be identified. WhiteWave’s faster growth and higher multiple could have been tempting to the likes of General Mills as well.

To summary all the involved parties in one picture, the relationship is as below.

The Synergy Gain

Danone has already announced the synergy they can get from this company’s biggest acquisition within this 10 years as below four points:

• Significant run-rate EBIT synergies of $300 million by 2020;

• Improvement of Danone’s full year like-for-like sales growth profile by an extra +0.5% to +1%;

• Accretion of EBIT margin from 2018;

• Solid EPS accretion from 2017 and above 10% based on run-rate synergies.

I believe from financial point of view, Danone will benefit a lot and successfully get above gain as mentioned. There are several reason supporting this conclusion:

First, Danone completed this acquisition all by cash and the cash was from debt, the increased debt will help Danone reduce significant amount of taxes, and also the global capital market forecast on debt rate will be lower and lower.

Secondary, WhiteWave has good business performance and the margin its will generating in the next several years or sure will be included in Danone report and accretion the EBIT margin; also the sale growth forecast about 1 billion/year, will easily help increasing Danone sales growth in 4%, so the 0.5%-1% sale growth rate in Danone’s announcement is kind of consecutive.

At last, the synergy in long term is from these two company’s business complementary, animal protein and plant protein; and their company mission are very similar is to bring as health to people through health product. Only when the mission and culture of two company can fit with each other, the synergy can come out.

Conclusion

We have go through this very typical acquisition into detail, I want to list two main concern for the future of new Danone as the conclusion of the analysis of this acquisition:

The portfolio management: We already know that the portfolio memento is one of the driver of the company growth, but all the portfolio need to be managed and strengthen around company core business and strategy. Danone used to drop some business to be more focus, now after taking over WhiteWave, lots of new brand and product belongs to new Danone. A carefully review and smart portfolio strategy is needed.

The culture integration: Most of merger and acquisition case failed at culture integration sector, not only due to the company culture difference, but also due to the country and people culture difference. European and American culture is similar, but American culture and French culture still have lots of difference, Danone had some bad experience in other country joint venture business, should be more careful in this big acquisition and its follow up work.

Reference:

[1] WhiteWave-Foods-Q4-FY-2016-Earnings, 2.16.2017, WhiteWave Inc

[2] DANONE REGISTRATION DOCUMENT 2016, March 17, 2017, Danone

[4] <WhiteWave Foods>, https://en.wikipedia.org/wiki/WhiteWave_Foods

[5]< Growth in the packaged food industry > http://www.mckinsey.com/industries/consumer-packaged-goods/our-insights/growth-in-the-packaged-food-industry

[6] Danone Completes Acquisition of WhiteWave, Press release – April 12th, 2017, Danone

[7] Danone Receives Court Approval to Complete WhiteWave Acquisition, Press release – April 6th, 2017, Danone

Appendix

Appendix 1 – WhiteWave Financial Information 2010-2016

Appendix 2 – EPS of Danone 2016.

Appendix 3 – Danone 2016 Balance Sheet