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  1. Analysis
March 18, 2011

In the spotlight: General Mills’ pursuit of Yoplait

Months of speculation were drawn to a close this morning (18 March) when it was confirmed that General Mills has entered into exclusive negotiations to buy a stake in French dairy brand Yoplait from investment fund PAI Partners.

Months of speculation were drawn to a close this morning (18 March) when it was confirmed that General Mills has entered into exclusive negotiations to buy a stake in French dairy brand Yoplait from investment fund PAI Partners. If the deal goes through, it will see the US food group acquire a significant holding in the world’s second largest dairy brand and draw to a close any question marks over General Mills’ rights to the US Yoplait trademark. Katy Humphries reports.

US cereal giant General Mills has entered into exclusive talks to buy the 50% stake in French yoghurt maker Yoplait that was put on the block by investment fund PAI Partners last summer. The company has offered EUR800m (US$1.13bn) for PAI’s Yoplait shares.

The proposed agreement would partner General Mills with French dairy cooperative Sodiaal and reorganise the Yoplait business into two units, creating an operating company that General Mills would take a “controlling role” in and a separate holding company that would own the rights to the Yoplait brand. Under the deal, Sodiaal will take a 50% stake in the brand-holding entity. just-food understands that the ongoing negotiations include talks to reduce Sodial’s stake in the operating group.

The total transaction value will put a price tag of EUR1.6bn on 100% of Yoplait’s shares, PAI and Sodiaal said in a statement released earlier today.

So, as works council consultations and exclusive negotiations get underway it now looks likely that General Mills will partner with France’s largest dairy co-op to develop the Yoplait brand.

General Mills and Sodiaal are far from strangers. The US group has held the license for Yoplait in America for the past 34 years and the brand now generates annual sales of US$1.5bn in the market.

General Mills has thrown its weight behind expanding Yoplait domestically and signalled its intention to lead category growth in a market where yoghurt consumption still trails European levels. The group has ramped up its investment in NPD and reformulation, focusing on increasing its appeal to key demographics and consumption drivers such as health and wellness. Last autumn, General Mills revealed plans to increase production with the investment of $100m in expanding its Yoplait manufacturing facility in Tennessee.

A spokesperson for Sodiaal tells just-food that General Mills’ US success with Yoplait was a key factor making the company an attractive partner. “General Mills and Yoplait have developed an excellent business in America. The brand holds a market leading position [accounting for] 35% of total yoghurt sales and America is one of Yoplait’s largest markets. This gives us much confidence in General Mills’ [ability] to build on the success of Yoplait.”

This is not to suggest that General Mills and Sodiaal have always experienced a smooth relationship. Indeed, the companies have been embroiled in an ongoing dispute that has seen Sodima, the licencing arm of Sodiaal, insist that it wants to end the US licensing agreement between the groups.

The inability of the two sides to reach an agreement on licensing terms saw General Mills file for arbitration at the International Chamber of Commerce in New York last September. At the time, General Mills chairman and CEO Ken Powell warned that the dispute could rumble on “for years”.

An early end to this confrontation – and one that sees it hang on to the rights to Yoplait in the US – must surely have been a significant factor motivating the deal from General Mills’ perspective, particularly given that Yoplait generates a none-too-insignificant chunk – about 15% – of total General Mills sales.

According to analysts at Janney Capital Markets, “clearing up” the legal issue of its rights to Yoplait in the US was the “optimal outcome” for General Mills. “On its face, the deal increases Mills’ exposure to competitive, slower-growing western European markets, which doesn’t make a lot of sense without some consideration of settling that risk. Keeping the US rights with no additional terms was the optimal outcome, so it is fair to see this partially as a payment to take some risk off the table,” the analysts write in a note to investors.

General Mills and Yoplait have also both highlighted their desire to expand globally, particularly in high-growth emerging markets.

Back in 2002, when Sodiaal sold a 50% stake to PAI, the dairy group indicated that it hoped the alliance would boost growth in emerging markets. However, this ambition has been slow in coming to fruition. While privately-held Yoplait’s financial records are not readily available, according to Datamonitor International in 2009 the brand generated over 80% of its retail value sales in North America (52%) and western Europe (29%). Yoplait’s largest emerging market is Latin America, which accounted for 6% of its 2009 sales, while the brand’s presence in Asia-Pacific is largely centred on South Korea, whose yoghurt market is expected to contract by 2% over 2010-2015.

Meanwhile, the vast majority of General Mills’ sales are concentrated in the US. In the fiscal year to July 2010, the group booked total sales of $14.8bn, of which only $2.7bn were generated overseas. Speaking at the recent CAGNY investor conference, General Mills management echoed the now familiar mantra that the group expects growth from its international units to fuel profits in the mid-term.

However, while both companies share the goal of expanding in emerging markets, in reality this deal does little to immediately further such ambitions – a fact that lead many commentators to view the two as less than likely bedfellows. During the highly competitive bid process, which saw interest expressed by nine industry and financial suitors, it was widely speculated that the likes of China’s Bright Foods or Mexico’s Groupo Lala could win through by offering Yoplait increased access to new markets.

Nevertheless, Sodiaal remains insistent that the partnership will further its international ambitions.

The French group said that Yoplait would look to strengthen its operations in western Europe as well as “accelerating its international expansion”, particularly in emerging markets where General Mills has operations centred on strong brands, such as China with Häagen-Dazs and India with Pillsbury. General Mills added that it would focus on growing the Yoplait brand “in France, Europe and around the world.”

Morningstar analyst RJ Hatterby concurs that General Mills has the experience and expertise necessary to further develop Yoplait international sales.

“General Mills is starting to make inroads internationally. Overseas sales account for about 20% of sales now. I think that they will be a suitable partner to drive international expansion,” he tells just-food.

With the future of its US Yoplait business secured through this deal, the challenge going forward will be for General Mills to grow the Yoplait brand in emerging markets and leverage its existing infrastructure in countries that have a burgeoning yoghurt category, such as China and India.

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