French food company Danone announced Thursday that it is acquiring the WhiteWave Foods Co.— maker of Horizon Organic dairy products and Earthbound Farm salad greens — for $10.4 billion, expanding its business in the United States.
Stephanie Strom of the New York Times has the news:
The deal, aimed at enhancing the American profile of the company that makes Dannon and Activia yogurts, will significantly increase Danone’s presence in the lucrative organic foods market. Also, through WhiteWave’s ownership of the Silk brand of soy and nut milks, the purchase will give Danone a toehold in the flourishing market for plant-based dairy substitutes.
The acquisition underscores Danone’s determination to do a better job meeting the changing tastes of consumers, including by shifting aggressively toward the use of organic milk, which is more expensive than conventional.
Emmanuel Faber, chief executive of Danone, said in a telephone interview that the company’s plans were comprehensive, from farm to table, and were influenced by shifting cultural attitudes and tastes.
“This is really about resilience, over all, and therefore the long-term adaptation of models of agriculture and eating and drinking practices,” he said. “Consumers want diverse eating and drinking options, but we cannot meet that demand unless we diversify the way we produce food.”
But the price tag solidifies what we already knew: Natural and organic brands are now simply mainstream. “We’ve got to stop calling it the natural food industry,” says Errol Schweizer, a former Whole Foods executive who is now an industry adviser. “It’s just the food industry now.”
The deal between the French dairy company and the maker of brands like Horizon Organic milk and Silk soy milk is just the latest in a massive wave of consolidation in the sector. Food giants, which have struggled to grow as consumers turn their backs on packaged and processed goods, have gobbled up industry upstarts that are more in line with how people today are eating. (For more on this, read “The War on Big Food.”) Some analysts noted this morning that they would not be surprised to see competing bids for WhiteWave pop up.
For Danone, WhiteWave does two things that would seem to be diametrically opposed: It gives its possible new parent a foothold in plant-based dairy alternatives with its Silk brand as well as, through Horizon, the dairy industry itself—the very sector the plant-based industry is trying to disrupt.
In some ways this is only a reflection of how consumers are confused and confusing when it comes to what they eat. During the Danone-WhiteWave press briefing this morning, the companies noted that plant-based alternatives to milk and yogurt are growing at an 11% compound annual growth rate in the U.S., while organic dairy is growing at 8%.
The French dairy group can get away with it because expanding outside of Europe looks attractive, and debt comes cheap.
The maker of Activia yoghurt, which a decade ago was deemed by France too precious to be taken over by foreigners, will pay almost 20 times WhiteWave’s forecast EBITDA. That in itself is not outlandish, since the U.S. group is growing rapidly, its sales increasing at twice the rate of Danone’s. The trouble is that WhiteWave, whose shareholders include activist Hudson Executive Capital according to Eikon data, is already trading at a full-fat valuation of 31 times the next 12 months’ estimated earnings.
Assume the company can sustain a growth rate in its operating profit of 12 percent each year from now until 2020, which is when Danone expects the synergies will come through. Add the resulting $666 million of operating profit to the $300 million of value Danone hopes to create from the deal, tax it at WhiteWave’s rate of 35 percent, and the return for investors is just 5 percent, below the target’s likely cost of capital.
That may seem at odds with Danone investors’ initially positive response, pushing up the shares more than 5 percent after the deal was announced. But that may rest on other factors, like the fact Europe may be about to take a big hit from the UK’s decision to leave the European Union, and WhiteWave doubles the percentage of Danone’s sales that comes from the United States.