Glenboden M & A Originations

Danone’s acquisition of Royal Numico provides breakthrough into health & wellness

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Origination Status joint announcement of group acquisition, July 2007;
Asset Royal Numico NV, no. 1 -2 global baby food and clinical nutrition company;
Buyer Groupe Danone (France), multinational food group;
Seller shareholders of Royal Numico (Holland);
Buyer Rationale refocusing portfolio into ‘pure-play’ healthy nutrition;
Seller Rationale attractive valuation and financial terms (100% cash);
NBs deal to bring together ‘the 2 only true worldwide ‘specialists’ focused on Health and Nutrition’
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This deal is a real case catch –up in health & wellness, on the part of Danone, vis-a-vis Nestle’s 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 –on acquisitions in these categories, in various key geographies; it’s decentralized strategic model should facilitate that. However, given the very high cash price paid for Numico, and its effect on Danone’s 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 € 55 per share offered by Danone gives a hefty 44% premium to the reference stock market price. What does that mean in multiples’ terms?

Danone has cited a valuation of x21,7 EBITDA (2007F). Fine, but we’ve used 2006A data, in order to calculate both P/S and P /EBITA; plus we’ve added Numico’s 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. What’s more, if we calculate at the 2007F level, by adding 10% to both sales and EBITDA, in line with Danone’s guidance for Numico’s performance this year, our conclusion is unchanged.

Nor do synergies help the picture: there is little cost overlap between Danone and Numico, except in Danone’s relatively small Bledina baby food business, which is to be folded into Numico as it changes its identity into Danone’s new Nutrition division or ‘pillar’.

There is also talk of revenue synergies, something to do with leveraging Numico’s baby food health marketing into Danone’s dairy division, but this sounds vague or at best ‘in the pipeline’.

Overall, however, it would be wrong to say that Danone is ‘over-paying’ for Numico. The deal is truly transformational for the Group. It is able to fill a ‘demographic gap’ 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 ‘benchmark’ Nestle deals, arguably Danone has less post –deal 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 Danone’s case than in Nestle’s (Gerber being very US –focused).

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 Nestle’s targets were growing only in single-digits.

Finally, this deal must be seen in the context of Danone’s ‘two-step’ transformation. The precision with which Numico ‘plugs the gap’ left by the pending divestment of LU, in terms of scale and geographic spread, combined with the strategic finesse with which an ‘unhealthy’ biscuits division is replaced by a 'new frontier' nutrition division, and all within the space of a few months, is truly breathtaking.

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Size (€ mln) 12.300
Sector demographic nutrition
Asset Quality global branded leader
Seller large plc
Buyer large plc
P/S 5,3
P/Ebitda 28,6
Type enterprise value
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