
Why Danone's Blockbuster Deal for WhiteWave Is Really Happening
Updated with analyst comments.
The push for mega deals in the packaged food industry has returned, likely for two very simple reasons.
Yogurt maker Danone fired the latest bazooka shot on Thursday by announcing it would acquire organic food producer WhiteWave Foods (WWAV) for $56.25 a share, or an enterprise value of $12.5 billion. The value of the deal represents a premium of about 20% over WhiteWave's closing market cap on July. 6. By adding WhiteWave's organic dairy portfolio, Danone will shoot to a leading position in the U.S. refrigerated dairy market and will become one of the top 15 largest U.S. food and beverage manufacturers in terms of sales. Following the closing of the transaction, Danone's North America footprint would increase to 22% from about 12% of its total portfolio.
"It [the deal] will allow us to enhance Danone's growth profile and reinforce our resilience through a broader platform in North America," said Danone CEO Emmanuel Faber in a statement.
WhiteWave has often been discussed as a potential buyout candidate due to its broad portfolio of organic offerings in what continues to be hot market for healthier food options.
"If the food space begins a period of consolidation, WhiteWave's name is sure to come up in many of the discussions given its prime position in an increasingly important healthy/organic market," said Jim Cramer and Jack Mohr, portfolio managers of the Action Alerts PLUS Charitable Trust Portfolio in a note on July 1, adding, "The company is a double-digit grower in a sector desperate for growth, and that can't be ignored." In fact, WhiteWave may still be in play despite Danone's seemingly fair offer.
Jefferies analyst Akshay Jagdale, in a note after the deal was announced, said, "Given that the 24% premium is below the over 30% premium typically seen in take-out bids, as well as the fact that WhiteWave has widely been considered a buyout candidate with several potential suitors, we think other potential bidders could enter the fray."
The marriage in the dairy space comes a few days after a proposed tie-up for sweet treats. Mondelez (MDLZ) - Get Report ,which produces Oreo cookies and Cadbury chocolate, recently announced it made a $23 billion cash-and-stock bid for iconic chocolate maker Hershey (HSY) - Get Report . Hershey quickly rebuffed Mondelez, which didn't say it was through trying to pursue a deal.
Packaged food's thirst for deals -- during a highly contentious election season that has cast a dark cloud over near-term U.S. economic growth -- likely comes after executives have come to terms on few longer-term things.
First is that the great U.S. retail store expansion boom of the past 20 years led by names such as Walmart (WMT) - Get Report and Target (TGT) - Get Report -- which has given food players ever more shelf space -- is effectively dying out. (Thank you for that one, Amazon (AMZN) - Get Report ). What this means is that going forward major food brands will need to find out how to improve the economics of each item they sell instead of relying on retailers opening more stores to fuel sales and profit. Merging to gain a greater presence in a specific supermarket aisle as well as cutting costs through consolidating operations is the primary way to improve those economics.
Meanwhile, another reality for packaged food is that raw materials such as sugar, fuel, cocoa beans, and milk (and yes, even water) are likely to be in short supply in the future due to expected global population growth. The current world population of more than 7.3 billion is expected to reach 8.5 billion by 2030, 9.7 billion in 2050 and 11.2 billion in 2100, according to the United Nations. Sure, raw materials prices may be volatile from day to day as a result of daily news headlines, but over time their direction is going to be higher as a result of the looming population boom. Therefore, it's best for the shareholders of food companies if executives consolidate operations today, improve their negotiating power with raw materials suppliers and be fully prepared to play in a much larger world.
That is unless one is keen on paying $15 for a gallon of milk or $10 for a candy bar in 2030.
WhiteWave is a holding in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells WWAV? Learn more now.









