Ageing and allergies aid Danone as yoghurt cools

By James Regan

PARIS (Reuters) - The world's biggest yoghurt maker is not necessarily the first company a person with a milk allergy would turn to for help.

But that is one example of the sort of customer French food group Danone (DANO.PA) is targeting to grow its medical nutrition business alongside baby food as dairy sales dip through the economic crisis and bottled water loses its sparkle.

Acquisitions are likely to play a key part in that expansion, where barriers to entry in foreign markets are often high, after Danone carried out a rights issue to raise some 3 billion euros (2.6 billion pounds).

"As people become more health conscious, I think clinical nutrition offers huge opportunities for growth," said Bernstein Research analyst Eric Scher. "It is fast-growth, high-margin. I believe that double-digit growth can be sustained."

But he said there was no obvious target that could give the business greater scale overnight: "I don't think it's going to be one transformational change. It's going to be smaller acquisitions and pushing into markets where they are not."

Danone's medical nutrition business provides liquid food for hospital patients unable to eat solids, food supplements for elderly people with failing appetites and tailor-made products for allergy sufferers or those with conditions such as epilepsy. Brands include Nutricia and Neocate.

The division contributed only a tenth as much revenue as dairy last year, but sales jumped to 854 million euros from just 133 million the previous year, boosted by the purchase of Dutch group Numico that also helped baby food sales more than triple.

Danone last month sold new shares to existing shareholders to help cut net debt, which reached 11.26 billion euros at the end of 2008 after the 12.3 billion purchase of Numico in 2007.

The company said the move would enable it to make acquisitions worth up to around 500 million euros.

Medical nutrition buys are on the group's radar, with its footprint "still very much in its infancy" and "very much focused on Europe", co-Chief Operating Officer Emmanuel Faber said when the rights issue was unveiled.

It is an "industry that will consolidate in the next several years and we intend to be a proactive contributor to this consolidation," he said.

SHARES SUFFER DAIRY DISCOUNT

Danone was founded 90 years ago in Spain to promote yoghurt containing cultures from France's Pasteur Institute to combat widespread intestinal disorders suffered by children in the years after World War I. It expanded to France a decade later.

But now the company, whose brands include Evian water and Actimel yoghurt, is seen by some analysts as too dependent on dairy, parts of which can be vulnerable in recession.

Indeed, this is reflected in the fact the shine has come off Danone's historical valuation premium.