For several years now, the major food groups have been playing a tight game: there are almost anemic growth perspectives dwindle in saturated markets, while so-called ‘activist’ investors - like for example Dan Loeb at Nestlé, or Nelson Peltz at P&G - have chosen them as their target.
The latter have decided to exploit the exceptional recurring revenues of the above-mentioned groups to maximize the capital returns for the shareholders - via dividends or massive share buybacks, like recently at Unilever - in parallel with ambitious cost reduction programs.
While they can boost the market capitalization in the short term, and ensure a quick profit for the hedge funds and their clients, these kinds of strategic options amputate the cash flow, and by extension the long-term growth perspectives of the company which need to be found on the acquisition side.
Just like its peers, Danone is walking on thin ice - and under strict surveillance of Corvex, a hedge fund that entered the capital in the summer of 2017 with an investment of $400 million.
While increasing its dividend payments - largely paid in shares rather than cash, which will certainly lead to the frustration of some - the French group has acquired the American company WhiteWave Foods - a leader in organic dairy products and soy derivatives - for $12.5 billion.
Such a positioning suits Emmanuel Faber, the iconic CEO of Danone and an apostle of responsible capitalism, perfectly. Faber is known for his original profile in the otherwise pretty quiet world of the boards of big food groups.
Danone was, by the way, remarkably supported by the credit markets to execute this transatlantic acquisition which was entirely financed by a very affordable bond subscription - the annual interest expense of the European slice is below 1% - with a long maturity.
Under the combined effect of a decent cost control and a seemingly successful integration of WhiteWave, the EBITDA of the French group increases by almost a billion euros between 2016 and 2017 (from 3.7 to 4.7 billion), for a turnover of around 25 billion euros (22 billion in 2016).
This encouraging trend is a priori strengthened by an excellent first semester for 2018, with an EBITDA that reaches 2.9 billion euros, almost 900 million more than last year during the same period.
In this context, Corvex will without a doubt put pressure on the management to obtain a dividend increase - this time in cold hard cash. Such a development would probably be very well received by the market, even more so in the current interest rate context.
The acquisition of WhiteWave - a group with a turnover that is seven times lower than that of Danone - valued the American company at around 23 times its EBITDA. At an otherwise higher scale, the reckless proposal from Kraft Heinz - supported by the Brazilians from 3G Capital and Warren Buffett - to acquire Unilever for $143 billion valued the Anglo-Dutch group at 15 times its EBITDA, a multiple that is more in line with the actual standards of the food industry.
These references enable us to benchmark the current valuation of Danone. At 68 euros per share and on a diluted basis of 647 million shares, with 16 billion of long-term financial obligations, the value of the company reaches 60 billion euros. That is almost 13 times its EBITDA for 2017 and - if the positive trend continues - around 10 or 11 times its expected EBITDA for 2018.
This a priori reasonable valuation could turn the French group into an ideal takeover target, provided that the government - already heated by the Alstom affair - gives its consent. In 2005, the latter already blocked the whims of PepsiCo since Danone was considered to be a ‘strategic’ company at the time.
On a less speculative basis, the group trades at around 30 times its profit after tax for 2017, and 24 times its expected profits by analysts for 2019. Although this valuation shows some optimism, it might struggle to satisfy the company’s most demanding investors.
The latter could indeed choose other big capitalizations that are of a similar quality but with a lower valuation - like Publicis
- over Danone, despite Danone’s higher dividend payments.
Translated from the original article
Article published on 09/03/2018 | 07:58