Danone today (12 December) made a series of announcements, including a division to focus on Africa, an update on the future of the company’s medical nutrition arm and changes in senior management. Analysts saw the moves as a sign recently-appointed CEO Emmanuel Faber was making his mark on the business and they gave the initiatives a warm welcome. Dean Best reports.
For the first time since taking the top job this autumn, Danone CEO Emmanuel Faber today (12 December) gave a firm indication of how he plans to take the French food giant forward – and shares in the Activia maker promptly fell. Analysts, however, reacted positively.
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Following a board meeting yesterday, Danone this morning announced plans to form a new division for its operations in Africa – a region where it plans to invest more – and said it would retain its medical nutrition arm, which it had been rumoured to sell. The moves were outlined alongside changes to Danone’s management team, including the appointment of a new CFO and a new executive in charge of the company’s challenging fresh dairy business.
Since Faber was formally appointed in September, Danone has made significant announcements, including its acquisition of a 25% stake in Chinese infant formula producer Yashili International Holdings.
Faber’s predecessor, Franck Riboud, is still at the business as chairman and presided over yesterday’s board meeting. However, analysts saw today’s announcement as an indication Faber is putting his stamp on the business. “After three months, I see this press release as a big intention from the CEO to be quite clear on the fact that the change is for now. It’s a big sign Emmanuel Faber is now fully involved within the business,” Natixis analyst Pierre Tegner said.
The stock market reacted less than favourably, with Danone’s shares falling. Danone’s shares were down 1.57% at EUR54.54 at 16:57 CET.
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By GlobalDataHowever, judging by the reaction of analysts covering Danone, it would be too simplistic to look at the company’s share price and conclude the market is unsure about Faber’s plans.
According to Danone watchers, the fall in share price could have been due to a number of factors, from the pressure on the Russian rouble hitting sentiment in a company with a large business in the country through to its comments about its debt profile and the prospects for its credit rating.
In its statement today, the company said: “Danone will continue to expand capacity rapidly and build development platforms in fast-growing regions, particularly Asia and Africa. Investments made for this purpose over the past two years have resulted in a higher use of debt than in the past, at a level that could imply a credit rating one notch lower, and that is appropriate for this current period of development given the company’s sound cash-flow outlook and debt structure.”
Danone also narrowed its guidance for its 2014 organic sales growth and for its trading operating margins, a move that could also have weighed on its shares.
Tegner said Danone’s comments on credit rating were “probably fuelling some fears” but said the company’s overall announcement was “clearly positive”.
Pierre-André Térisse, Danone’s current CFO, will take charge of the Africa unit, which the company said it had formed to “accelerate expansion” in what it called a “strategic region”.
Alain-Sebastian Oberhuber, an analyst at Swiss investment bank MainFirst, has said in the past Danone should look to expand in Africa and suggested today any change to the company’s credit rating could come through deals in the region.
“The new organisation structure Africa highlights the potential for Danone in that region,” he wrote in a note to clients. “The [possible] change of credit rating [is] due to acquisition targets in Africa. Danone sees potential targets in the African fresh dairy market.”
As well as the fresh investment in Centrale Laitière, Danone has this year acquired a 40% stake in the holding company of Kenyan dairy group Brookside, a move it said would “significantly enhance” its reach in east Africa.
Tegner suggested Térisse could help Danone expand further in Africa effectively. “Probably they want a finance guy to develop Africa for two big reasons in my view. They need to be sure they have the right guy to make M&A in Africa in order to expand the business. On top of this, they want to be sure they have the right guy to balance growth and profitability,” he told just-food.
There has been a number reports in recent months Danone was looking to offload a major part of its business – its medical nutrition arm. However, Faber today insisted the unit still had a “role to play” in the company’s strategy.
In an interview this morning with The Financial Times, Faber said Danone would look to grow the medical nutrition division “through a mix of organic growth, acquisitions and there may be joint ventures”. He added: “Maybe some day there will be marginal disposals – that doesn’t change what I said about the role of our four businesses.”
Since the reports of a possible sale of the unit – and indeed talks with potential buyers – emerged earlier this year, analysts had sought to outline how Danone could spend the proceeds, with bolt-on deals in emerging markets and even a move for US infant formula producer Mead Johnson mooted.
Analysts were sanguine about Danone’s decision to keep the medical nutrition business. Tegner said keeping medical nutrition showed Danone did not want to offload the asset “at any price”. “Mr Faber is a very hard and tough negotiator and I suppose he wants to be very clear they will not dispose assets at any price even if they have some acquisition projects,” he said.
However, Tegner argued it was “not obvious” medical nutrition is a “top priority for Danone” for the future. He said if a “very nice M&A opportunity” arises, it would be “strategic” to get “a good price, a fair price” for the medical nutrition business and he added: “It’s clear the day Faber receives a nice offer for medical nutrition, they would probably reconsider.”
Analysts have been divided on whether Danone should pursue Mead Johnson and, with the company’s medical nutrition arm staying, it would appear such a significant move is unlikely.
Tegner said Danone is not under any pressure to move for Mead Johnson nor to sell medical nutrition – but he outlined a scenario involving both transactions that he believed would benefit the business.
“If they receive a good price for the medical nutrition business and they have solutions to make a joint bid for Mead Johnson, they will have to make this opportunity,” Tegner says. “If they can get a price of EUR4.5bn (US$5.6bn) on medical and decide to dispose their stake in Yakult and find a partner to take the Chinese part of Mead Johnson, that would be a fantastic switch. The level of debt would not rise significantly. They will not need to make an equity issue. The switch would improve the risk profile of the group geographically, improve the critical size in North America and Latin America and the rest of Asia and would simplify the group.”
However, such matters are, for now, theoretical.
Another key part of today’s announcement was a management reshuffle at the business. Cécile Cabanis, vice-president for finance within Danone’s fresh dairy products division, has been promoted to CFO.
Analysts were positive about the moves, notably the decision to move Gustavo Valle from his role in charge of Danone’s European fresh dairy business to lead the fresh dairy division worldwide, was welcomed.
“The management change in fresh dairy is reasonable as the business faces several challenges with Europe gaining profitability back at the expenses of lower organic growth rate, transforming the US market to grow as well in the traditional dairy market and not just in formerly high growth category Greek yoghurt and finally to manage continuous high growth emerging markets. We met the new head of global fresh dairy and like his long experience in the category and his dynamic,” Oberhuber wrote.
Tegner said: “It’s clear that Emmanuel Faber is now driving the business. You can expect further changes in terms of operational management. All of the top managers were named by Bernard Hours, [formerly co-COO alongside Faber] and over the last five years Faber was only focused on corp governance, finance, strategy and he was not able to drive the business operationally. Bernard Hours has left so you can expect many other changes.”
