It has been quite a week for French food giant Groupe Danone. An offer for Dutch nutrition group Royal Numico came just days after it agreed to sell its biscuits and cereals business to Kraft. In between times, rumours of PepsiCo's interest in Danone, also resurfaced. Has Danone done enough to strengthen its business and, at the same time, prevent itself from becoming a takeover target? Dean Best reports.

This weekend, London played host to one of France's sporting institutions, the Tour de France. It's arguably the world's most prestigious cycling event, a race that demands speed, tenacity and endurance.

In recent days, one of France's leading consumer goods companies, Groupe Danone, has displayed some of those qualities in striking two key deals in just under a week.

Danone, renowned for brands including Activia yoghurts and Evian bottled water, is looking to reposition its business at the head of a pack of companies chasing growing demand for healthier products. First, the company agreed a deal to sell its European biscuit and cereals business to US giant Kraft Foods for EUR5.3bn (US$7.2bn). Then, yesterday (9 July), Danone tabled an offer to buy Dutch nutrition group Royal Numico for around EUR12.3bn.

The pace with which Danone has acted is notable, especially alongside rumours resurfacing of interest in the company from US food and beverage group PepsiCo. However, questions over Danone's long-term future remain. Once the dust has settled on these deals, will Danone emerge as a stronger company with a robust business at the growing ends of the market? And will the company have strengthened itself enough to withstand possible interest from its larger rivals?

Industry watchers believe that Numico, with a business focused on health and nutrition and including baby food brands like Milupa and Cow & Gate, is a good fit for Danone. "The Numico businesses fit perfectly with Danone's investment criteria and strategic orientation," analysts with Cheuvreux said in a research note today. Analysts point to the growth in baby food and clinical nutrition as the justification behind Danone's move, a rationale also shared by Nestlé in recent months as it looked to focus more on these categories with a series of acquisitions.

Earlier this year, Numico forecast sales growth of up to 12% for 2007 and analysts believe that there is sustained mileage in the business. "(Danone) should be able to continue to grow sales for the next few years; I see no reason whatsoever for that to suddenly change," Paul Linssen, an analyst at the Petercam brokerage in Amsterdam told just-food this afternoon.

However, some onlookers believe that Danone has offered a pretty full price for Numico. Its EUR55-a-share bid represents a 44% premium on Numico's average share price over the last three months.

With Danone's offer valuing Numico at EUR12.3bn - or over 20 times its forward EBITDA - some argue that Danone is paying a hefty price to create what its chairman and CEO Franck Riboud is calling the "most powerful" health food company in the world. "The price set to be paid is quite fierce," Linssen says.

And, when one looks at other stocks in the market, it is hard to disagree. Shares in Nestlé rose this morning with some believing the Swiss food giant's shares are now undervalued. Danone's offer to buy Numico is at a larger premium to Nestlé's recent acquisitions in the sector, including April's deal to buy Gerber, the largest baby food brand in the US.

Perhaps Danone's bid for Numico needs to be looked at in the context of the re-emerging rumours of PepsiCo's interest in the French company. Those rumours appeared again late last week, in the wake of Danone's agreement to sell its biscuits business to Kraft. The speculation also comes some two years after the French government controversially proclaimed it would protect Danone from a takeover from an overseas company. Perhaps Danone feels that an acquisition of Numico would protect it from any unwanted interest.

"To me, it looks like a bit of a panic realisation after the sale of the biscuit business last week," Linssen argues. "Numico is an attractive target and strategically it makes a good fit for Danone - it is just a question of the timing and the price itself."

It seems only the passage of time will allow Danone to justify the price it is looking to pay for Numico. Industry watchers are largely in agreement that Danone is buying into attractive and growing categories. One or two analysts, Linssen included, point to concerns that both Numico's CEO and CFO will leave the company after the sale to Danone, departures that could dilute the Dutch firm's performance. Other industry watchers have expressed concern that rising dairy costs could weigh on the Numico business, a factor that could also put pressure on Danone.

Danone has displayed the speed and tenacity that the riders in its country's flagship sporting event, the Tour de France, are renowned for. Now Danone needs to show it has the riders' hunger and endurance to grow its remodelled business in the face of commodity pressures and, potentially, life as a takeover target.