Danone WhiteWave Shows Picky Eaters Dont Come Cheap

(Bloomberg) -- Big corporates pay top dollar to catch up with rapid changes in consumer habits that have passed them by.

Take Danone. The French food group has agreed to pay $10 billion for WhiteWave Foods, a U.S. maker of organic food and plant-based dairy alternatives. On conventional measures, that's expensive. But Danone has some big-company advantages to lessen the pain.

WhiteWave is the fastest-growing U.S. food group, according to Canaccord research. It owns Horizon gluten-free macaroni cheese and Alpro almond drinks. This is Danone trying to reach that growing band of consumers who want to avoid GM foods and will stomach high prices to do so.

The premium in Danone's $56.25 per share offer is deceptively small -- 19 percent on WhiteWave's Wednesday close, 24 percent on the average 30-day close, and 8 percent on the stock's all-time high reached last year. It equates to an expensive 21 times WhiteWave's forecast 2016 Ebitda, against 15 times for other dairy deals in the past five years. Danone has cautioned that the deal won't cover its cost of capital for at least six years. That's in spite of it identifying $225 million of annual cost savings and $75 million of hoped-for revenue gains.

Danone's warning isn't just an attempt to lower expectations. The deal's total cost, including assumed debt, is $12.5 billion dollars. Assume the savings are fully achieved in 2018, when Whitewave is forecast to make $586 million of operating profit. The deal would then be giving Danone an extra $568 million of net operating profit after tax, a 5 percent return against the acquired business's 8 percent cost of capital. Extra revenue benefits will help further out. There's a credible opportunity to turbo-charge WhiteWave's sales by putting them through Danone's formidable sales and marketing machine.

What was Danone's alternative to a highly priced deal with a distant payback? The reality is that as an established multinational, it would struggle to create trusted alternative food brands capable of WhiteWave's 19 percent compound revenue growth. It could have sunk the same sum into organic investment (literally) but with no more certainty of generating satisfactory returns. Moreover, Danone can borrow at 1.125 percent right now. 

The potential to eliminate overlap shouldn't be underestimated -- the total financial benefits identified here are worth some 80 percent of WhiteWave's target operating profit.  These advantages mean it's probably less risky to address a strategic challenge via a pricey takeover. True, Danone's net debt will rise substantially, but it still expects to retain an investment grade credit rating. 

As for WhiteWave, by its own admission it had reached an awkward size -- beyond being an upstart challenger but lacking the financial muscle to expand globally. It looked likely to lose its independence before long, as Gadfly noted in February, given the presence of activists on the register. If Danone didn't pay up, it risked losing out to another buyer such as General Mills. A counterbid is possible. Still, Danone has the advantage of a deal that has the seemingly warm support of WhiteWave's management.

Like Ben & Jerry's, Green & Blacks and Pret a Manger before it, WhiteWave has been lured by a multinational keen to re-shape its business for the modern consumer. It would be cheaper for the food giants if they were better at pre-empting and leading tastes. Somehow they seem incapable, which means they'll still be hungry for more deals.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story: Chris Hughes in London at chughes89@bloomberg.net.

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net.