Danone pressured to strengthen margins as activists strike

Danone pressured to strengthen margins as activists strike

French dairy giant Danone has become the latest European target of activist investors, with New York hedge fund Corvex Management taking a €340m stake in the group.

Corvex’s move to build a position in Danone, equating to a 0.8% share, was disclosed on Monday.

It is understood that the investment firm is not currently pushing for any management changes. Shares in Danone nevertheless spiked on the news. Shares are trading up almost 2% in the week-to-date in Paris.

An ‘undervalued’ stock

Bernstein analyst Andrew Wood backed the investment case in Danone. Wood argued that the Actimel maker is “undervalued” and suggested a target price 26% higher than Danone’s current price.

Wood said that the excitement stirred by the Corvex move is representative of “a lot of interest we have seen from, and conversations we have had with, US investors” who want Europe’s largest food makers to increase their focus on shareholder returns.

“To the extent that these investors keep up the pressure on CEO [Emmanuel] Faber to deliver on his commitment of 4-5% top-line growth and +300bps of margin growth from 2017-2020 (to arrive at 16% by 2020) this is good news,” Wood suggested.

Danone’s 2020 strategy

Danone’s bid to build its profit margin to 16% relies on unlocking synergies through its recent acquisition of US group WhiteWave Foods, structural margin improvement and an efficiency programme that it has dubbed ‘Protein’.

Providing details during an investor event in May, Danone forecast $300m (€256.3m) in synergies at a recurring operating income level through the acquisition of WhiteWave, which produces dairy items under to Horizon Organic brand and plant-based beverages under the Silk brand in the US and Alpro brand in Europe.

Danone is tightening its resource allocation criteria to deliver "structural improvement of margin in all categories, via more discipline and a stricter resource allocation process to guarantee profitable growth".

It also expects its Protein programme to deliver €1bn in savings by 2020, with “at least” €300m net of reinvestment falling through to margin enhancement.

Takeover talk

Alongside increasing pressure to strengthen shareholder returns, reports this week have also suggested that Danone could itself be a takeover target for larger diversified food peers such as KraftHeinz or Coca Cola Co.

A spokesperson for KraftHeinz, which is backed by private equity groups 3G Capital and Berkshire Hathaway, declined to comment.

The US food giant, which was formed through the merger of Kraft Foods Group and HJ Heinz, wants to grow profits through significant M&A as organic growth remains elusive. The firm had a takeover bid for Anglo-Dutch consumer goods giant Unilever rebuffed earlier this year.

With a market capitalisation of around €44bn, Danone is seen as a digestible size for the likes of KraftHeinz, which itself has a market capitalisation of just over $105bn (€98.7bn).

Despite what many see as an improved political climate for large-scale M&A in France, Wood remains skeptical that a takeover bid for Danone would be successful.

“Danone is very inefficient and has great scope for margin improvement, which might make it interesting for KraftHeinz. However, there will probably be major push-back against KraftHeinz, both by Danone specifically and in France generally,” he said. “Coca-Cola might be more acceptable, but we cannot really see the business logic for it to acquire Danone.”

Nestle also feeling the pressure

Danone is not alone in feeling the heat from activist US shareholders. Third Point, a US hedge fund controlled by activist investor Daniel Loeb, took a 1% stake in Swiss food group Nestlé in June.

At the time, Third Point argued Nestle requires "a decisive and bold action plan" to address the "staid culture" and "tendency towards incrementalism" it said is evident at the company.

Nestle responded by saying it is focusing investment on “high growth” markets and categories and announcing a CHF20bn (€17.6bn) share buyback plan. The group is hosting an investor day next month and it is likely that further details of its strategic priorities will be revealed.

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