Danoneâs acquisition of Royal Numico provides breakthrough into health & wellness
- July 10, 2007
||joint announcement of group acquisition, July 2007;
||Royal Numico NV, no. 1 -2 global baby food and clinical nutrition company;
||Groupe Danone (France), multinational food group;
||shareholders of Royal Numico (Holland);
||refocusing portfolio into âpure-playâ healthy nutrition;
||attractive valuation and financial terms (100% cash);
||deal to bring together âthe 2 only true worldwide âspecialistsâ focused on Health and Nutritionâ
This deal is a real case catch âup in health & wellness, on the part of Danone, vis-a-vis Nestleâs recent acquisitions of Novartis Healthcare Nutrition and Gerber. By acquiring Numico, Danone has also made a transformational entry into infant and clinical nutrition, catering to both the very young and to the ageing population. Expect Danone to make add âon acquisitions in these categories, in various key geographies; itâs decentralized strategic model should facilitate that. However, given the very high cash price paid for Numico, and its effect on Danoneâs debt ratios, only small deals will be considered for some time, with companies that add new technology on top of the list.
The valuation story is indeed sobering. The âŹ 55 per share offered by Danone gives a hefty 44% premium to the reference stock market price. What does that mean in multiplesâ terms?
Danone has cited a valuation of x21,7 EBITDA (2007F). Fine, but weâve used 2006A data, in order to calculate both P/S and P /EBITA; plus weâve added Numicoâs long-term borrowings at y/e 2006 to arrive at enterprise value.
On this basis, Danone appears to have paid a significant premium to both of the Nestle deals. Whatâs more, if we calculate at the 2007F level, by adding 10% to both sales and EBITDA, in line with Danoneâs guidance for Numicoâs performance this year, our conclusion is unchanged.
Nor do synergies help the picture: there is little cost overlap between Danone and Numico, except in Danoneâs relatively small Bledina baby food business, which is to be folded into Numico as it changes its identity into Danoneâs new Nutrition division or âpillarâ.
There is also talk of revenue synergies, something to do with leveraging Numicoâs baby food health marketing into Danoneâs dairy division, but this sounds vague or at best âin the pipelineâ.
Overall, however, it would be wrong to say that Danone is âover-payingâ for Numico. The deal is truly transformational for the Group. It is able to fill a âdemographic gapâ in its portfolio, by acquiring a leading global baby food player.
With the clinical nutrition division of Numico, Danone is going even further, into the market for nutrition for people who are ill, malnourished or have special needs, with all of the regulatory, distribution and patent protection opportunities which that brings.
Coming back to comparisons with the two âbenchmarkâ Nestle deals, arguably Danone has less post âdeal execution risk, as it is buying one whole company, and not two business units of a bigger entity (Novartis). Also the geographic spread, certainly on the baby food side, is broader in Danoneâs case than in Nestleâs (Gerber being very US âfocused).
Financially, although the EBITDA margin is in the high teens in both cases, Danone is acquiring a double-digit sales growth rate company, when both of Nestleâs targets were growing only in single-digits.
Finally, this deal must be seen in the context of Danoneâs âtwo-stepâ transformation. The precision with which Numico âplugs the gapâ left by the pending divestment of LU, in terms of scale and geographic spread, combined with the strategic finesse with which an âunhealthyâ biscuits division is replaced by a 'new frontier' nutrition division, and all within the space of a few months, is truly breathtaking.