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The link between Lactalis and its dairy counterpart Danone raises eyebrows but some see it as a merit

Could two of the biggest dairy companies in the world be ready for some kind of transaction?

Bank advisers at private dairy giant Lactalis are said to be leading the rule over a possible move by fellow Frenchman Danone.

Rabobank ranks the family business Lactalis as the largest dairy company in the world. According to the bank’s annual ranking of companies in the sector, measuring annual sales of dairy products, Danone ranks fourth.

Wednesday, French economic publication The letter a said Perella Weinberg Partners wonders whether Lactalis should pursue a full acquisition of Danone or an offer for a handful of assets from the maker of Activia.

The surprise report came out the same day Danone – with a new CEO at the helm – released its first-quarter sales. As you’d expect, the rumor of Lactalis interest was relayed to Danone management during a call with analysts to discuss the numbers. “We are working very actively to repair our underperforming assets. We’ll let you know as soon as there’s anything new,” was all Danone CFO Juergen Esser said.

Reaction from equity analysts covering publicly traded Danone has been mixed. “Could there be merit in a merger with Lactalis? Yes,” said Bruno Monteyne of AllianceBernstein, emphasizing the “complementarity” of the companies’ operations. “A potential deal should get more airtime.”

At Stifel, Pascal Boll suggested that the investment bank’s own assessment of Danone’s dairy and plant arm means Lactalis would need to “bring significant cash to the table” and added: “The regulatory hurdles also seem daunting at first sight.”

If Lactalis makes an offer for Danone’s dairy assets – and so far it has so far been publicly discreet – independent dairy consultant Preben Mikkelsen says Danone should consider the offer.

However, it does have a note of caution. “Lactalis and Danone are, strictly economically, a good global mix, but organizationally it could be more problematic,” Mikkelsen suggested.

“Danone is a transparent company that focuses on soft values ​​like sustainability, animal welfare and climate impact. Lactalis is much more closed and focused on business development on a global scale with ongoing mergers and acquisitions.

“The company has done a great job of integrating a wide range of dairy companies from around the world into the Lactalis family – but Danone and Lactalis would be a culture shock.”

Changes at the top

As we head into the weekend, there has been no comment from Lactalis or Danone since Wednesday – nor should we expect there to be. For obvious reasons, most companies tend to be reluctant to talk openly about their M&A (or divestitures) strategies and it would be surprising if Lactalis or Danone were suddenly open about what they would be willing to negotiate (the optionally).

Nevertheless, The letter aThe report comes at an interesting time for Lactalis and Danone. Both companies have, over the past year, seen a change at the helm.

In February, Lactalis announced that CEO Philippe Palazzi was to leave after just 13 months in the role due to what appeared to be differences over the group’s strategy.

In a brief statement not detailed on the reasons for Palazzi’s departure, Lactalis noted that “the conditions for alignment with the group’s strategy could not be met”. He added that the president of Lactalis, Emmanuel Besnier, and Palazzi “end their collaboration as of February 3, 2022”.

A month later, the cheesemaker President said Chairman Emmanuel Besnier would effectively take on the CEO responsibilities (although the company didn’t say he would hold that title). Meanwhile, longtime executive Thierry Clément has been appointed to the newly created position of chief operating officer.

A “General Directorate of Operations” was also created. It will bring together the group’s major geographic areas under one roof, including manufacturing, management control and performance, purchasing, logistics, information systems, milk collection, marketing, sales and human ressources.

The changes at the head of Danone are well known. Last year, Emmanuel Faber was ousted as chairman and chief executive after some investors called on him to step down over what they saw as lackluster returns.

He was replaced as CEO by former Unilever and Barry Callebaut executive Antoine de Saint-Affrique, who officially took over the reins last fall. The Alpro owner has also seen a series of changes elsewhere in his leadership roles and on his board.

Six weeks ago, de Saint-Affrique presented his strategic plans for Danone publicly for the first time and appears to have taken a fix-or-flog approach to breathe new life into parts of the company’s portfolio. He said 10% of Danone’s portfolio could be subject to “rotation”, which he described as “a mix of acquisitions and divestments”.

The Danone boss added: “One of the problems we face in terms of competitiveness is [the] underperformance of certain assets, which have been underperforming for a long time. So we will be very determined. If we can’t fix them, we’ll sell them and then we don’t have any taboos or we don’t have sacred cows.

Whether those sacred cows include accepting an offer for the whole company – or for significant parts of it – remains to be seen.

However, AllianceBernstein’s Monteyne finds it worth considering a potential combination.

“There may be hurdles…but on reflection, this deal deserves decent consideration and should not be dismissed,” he says.

“The complementarity of their activities could not be better. Both are milk-related businesses, but with different end products (cheese/fluid milk vs. dairy/infant nutrition), making a strong case for large-scale benefits in source, manufacturing and distribution. It would also bring revenue synergies to Lactalis in the United States and China. The lifeblood of any deal is: does it make economic sense? And there is clearly a case here.

He adds: “The first obstacle seems to be size, with Lactalis around 12% less than Danone in terms of turnover, but its growth rate – at 6.1% over the last eight years – is significantly higher. to that of Danone at 1.8%. This growth makes Lactalis the most valuable company by far. If we combine this with potential divestitures – for example, [Danone’s] waters [business] possibly other small business units), this can be digested with the help of a financial partner. In private hands, it would also be time to continue the recovery of Danone.

Mikkelsen’s talk of a possible “culture clash” is also worth considering, given Danone’s position at the forefront of ESG and corporate responsibility efforts. It would be unfair to say that Lactalis ignores these topics, but it has been less vocal about its efforts to become a more sustainable company, with the focus of its public announcements focusing on mergers and acquisitions.

Lactalis’ rise to the top of Rabobank’s dairy rankings has had acquisitions as a major factor and the group’s transactions have continued this year. Last month, the company announced plans to buy a factory in the German state of Bavaria and three local dairy brands from the cooperative Bayerische Milchindustrie eG.

Depending on the nature of any deal between Lactalis and Danone, Mikkelsen thinks there would be hurdles to overcome when it comes to competition, especially in France.

“The French and European competition authorities will have to approve a takeover of this size and Lactalis could be forced to divest activities, particularly in France. Lactalis, through the Besnier family, also holds a significant share of Bel Groupe, which gives it a dominant position in the French market. In the United States, the takeover will also be perceived by the authorities, but a dominant position is less important here.

Stifel’s Boll is another who thinks there would be regulatory hurdles. He suggests that Danone could be open to offloading certain assets, such as the American organic company Horizon Organic. “What is more possible is that Danone is willing to sell underperforming assets – for example Horizon Organic – in line with the new strategy presented at the financial market day in March.”

We’re waiting to see what might happen next, if anything. Nonetheless, the Letter A report has industry watchers pondering Danone’s options.

“Should we sell Danone? Good question,” says Mikkelsen. “Danone has had several problems in recent years with stagnant growth and a disagreement on the company’s future internal strategy between the board and management. In addition, Danone can foresee huge problems with its activities in Russia. , Belarus and Ukraine in the coming years Danone is one of the major players in Russia due to ownership of Unimilk, one of Russia’s largest dairy companies.

More broadly, he adds: “Danone should consider agreeing to sell the dairy activities to Lactalis, which seems more robust to meet the challenges of the years to come than Danone.”

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