Danone of France to Buy WhiteWave in $10 Billion Deal to Bolster U.S. Portfolio

http://www.nytimes.com/2016/07/08/business/dealbook/danone-whitewave-deal.html

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Danone, the French company that sells Stonyfield yogurt and Evian water, said on Thursday that it had agreed to buy the WhiteWave Foods Company — maker of Horizon Organic dairy products and Earthbound Farm salad greens, among other brands — for about $10 billion in cash.

The deal, aimed at enhancing the American profile of the company that makes Dannon and Activia yogurts, will significantly increase Danone’s presence in the lucrative organic foods market. Also, through WhiteWave’s ownership of the Silk brand of soy and nut milks, the purchase will give Danone a toehold in the flourishing market for plant-based dairy substitutes.

The acquisition underscores Danone’s determination to do a better job meeting the changing tastes of consumers, including by shifting aggressively toward the use of organic milk, which is more expensive than conventional.

Emmanuel Faber, chief executive of Danone, said in a telephone interview that the company’s plans were comprehensive, from farm to table, and were influenced by shifting cultural attitudes and tastes.

“This is really about resilience, over all, and therefore the long-term adaptation of models of agriculture and eating and drinking practices,” he said. “Consumers want diverse eating and drinking options, but we cannot meet that demand unless we diversify the way we produce food.”

In buying WhiteWave, Danone, which had sales of $24.5 billion last year, will almost instantly double the size of its business in North America, where it is known as Dannon, to 22 percent of its portfolio, from 12 percent, the company said in a news release.

Dannon and General Mills, the maker of Yoplait, Liberté, Mountain High and Annie’s yogurts, have struggled over the last few years to preserve market share against the sudden rise of Chobani, in particular, and smaller yogurt brands like Noosa and Fage with more exotic flavors and “cleaner” ingredient lists.

About the only way the traditional yogurt giants had left to set themselves apart from their scrappy new competitors was to embrace organic milk, an expensive proposition.

That’s because to win organic certification for milk, the cows producing it must eat organic feed, which has been in short supply over the last several years. Stonyfield, the organic yogurt business owned by Danone, has struggled from time to time to get the milk it needs, as have other producers of organic dairy products.

General Mills recently announced a partnership with Organic Valley, a large organic dairy cooperative, to help support farmers who agree to go through the three-year transition process required to convert conventional farmland to organic production. Those farmers will supply organic alfalfa, grasses and other grains used to feed dairy cows, whose milk will then be eligible for organic certification under federal regulations.

And Dannon recently announced a program to radically overhaul its milk supply chain in the United States, essentially locking in pricing deals with the farmers who supply roughly 40 percent of its milk needs. In exchange, those farmers have agreed to take certain steps to improve animal welfare and reduce their environmental footprint.

They also have agreed to feed their cows non-G.M.O. feed, but at the time the program was announced, Mariano Lozano, chief executive of Dannon, said it would be difficult to go a step further and require organic feed. “Organic goes far beyond and has extremely high standards,” he said. “It’s very expensive.”

Now, however, Danone has apparently decided to simply buy an organic system. Under the terms of the transaction, WhiteWave shareholders will receive $56.25 a share in cash, a 24 percent premium over WhiteWave’s 30-day average closing price. The company’s shares closed at $47.43 on Wednesday. The deal values WhiteWave at $12.5 billion including debt and other liabilities.

“As a branded product manufacturer that sources organic ingredients, you just have to think a little differently about the supply chain,” said Gregg Engles, the WhiteWave chairman and chief executive.

WhiteWave, which has a stable of plant-based brands including Silk and Vega, also gives Danone valuable insight into the plant-based drinks business. Mr. Faber said the company had dabbled in so-called alternative protein sources for roughly a decade, building a plant-based brand in Spain and experimenting with fermentation methods in India.

Mr. Engles said there were key differences between organic consumers and buyers of plant-based products. “Organic consumers are motivated by a host of things, including first and foremost what they’re putting in their bodies and also what the production of that food has done to the land, its impact on the environment,” he said.

“Plant-based buyers are motivated by some of the same things but have greater concern about sustainability,” he continued. “Obviously, plant-based proteins have a much smaller footprint on the environment than an organic dairy business.”

So might Danone develop a plant-based yogurt? “I’d love to see us make some hybrid plant-dairy products in the future, moving us to another level of excitement that balances nutrition with innovation to get the best benefit out of both,” Mr. Faber said.

The purchase, the largest move by Danone since Mr. Faber took the top job in 2014, has been unanimously approved by the boards of both companies. It is subject to shareholder and regulatory approval and expected to close by the end of the year.

WhiteWave was spun out of Dean Foods in 2013, after an initial public offering the year before. The company reported a profit of $168.4 million on sales of $3.9 billion in 2015.

Mr. Engles will join Danone’s board after the transaction.

Lazard provided financial advice to Danone, while Wachtell, Lipton, Rosen & Katz served as its legal adviser. Goldman Sachs was the financial adviser for WhiteWave, and Skadden, Arps, Slate, Meagher & Flom served as counsel.