PARIS (Reuters) - Danone (DANO.PA) drove deeper into the fast-growing Russian dairy market on Friday, announcing a planned merger with Unimilk KUNMI.RTS which could pave the way for more consolidation in the European food sector.
The world’s largest yoghurt maker said the new entity would have around 21 percent of the Russian dairy market and lead sales in the Commonwealth of Independent States (CIS).
The combination of the two companies’ fresh dairy business in Russia, Ukraine, Kazakhstan and Belarus would have annual sales of about 1.5 billion euros ($1.8 billion). Danone will hold 57.5 percent and Russia’s Unimilk 42.5 percent.
“The CIS is a group of countries where the potential penetration and growth of the category both in terms of volume and value ... is among the most significant,” Danone Finance Director Pierre-Andre Terisse said.
Danone, meanwhile, will rethink its options for its 18 percent stake in Russian juice and dairy maker Wimm-Bill-Dann WBD.N, Terisse told a conference call with analysts.
Wimm-Bill-Dann said separately it was ready to buy the stake.
Danone, whose last transformational deal was the 12.3 billion euros purchase of the baby and medical nutrition business of Dutch rival Numico three years ago, made no secret it was looking at acquisitions.
But it had pointed to expansion via small bolt-on deals in dairy, medical nutrition, baby food and in emerging countries.
Fitch Ratings said in a note that the Danone deal indicated “the potential for further consolidation in the European packaged food industry, driven by a need to generate growth and gain cost efficiencies,”
“The pace of M&A activity in the sector accelerated late in 2009 and into 2010,” said Philip Zahn, Senior Director in Fitch’s Retail and Consumer Products team.
“This will likely continue, with the larger, higher-rated packaged food companies with strong access to the capital markets leading the industry’s consolidation. Given that the larger food companies are already highly diversified, most transactions will be of a “bolt-on” nature rather than being transformational,” he added.
Recent major sector transactions include Nestle’s NESN.VX purchase of Kraft’s North American frozen pizza business and Kraft’s acquisition of Cadbury plc, and Suntory’s purchase of Orangina ORANG.UL.
The Danone-Unimilk transaction is expected to close toward the end of the year and would boost Danone’s earnings per share from 2011, the company said.
The deal would increase Danone’s net debt by 1.3 billion euros, mainly because of “put” options given to Unimilk shareholders allowing them to dispose of part or all of their shares in the new entity, Danone added.
Terisse said the potential for fresh dairy products in Russia and the CIS countries was very high.
The two groups’ geographical presence, product ranges and distribution networks are complementary, he added.
In a research note, Oddo Securities analysts said the deal was “a strategically interesting merger for a limited price,” giving Danone scale in a key emerging market.
Danone generates more than half of sales from its dairy business.
They added: “The success of Danone in Russia in fresh dairy products had already significantly reduced the need for their (Wimm-Bill-Dann) stake and with Unimilk we can consider that Danone is clearly on its way out.”
The Unimilk deal would initially negatively impact group margins because of Unimilk’s low profitability, Terisse said.
“The merger will, however, generate significant synergies and the joint venture is expected to reach the current level of operating margin of Danone Russia within three years, that is by 2013,” he added.
Unimilk posted sales of 969 million euros in 2009, Danone said in a presentation. It has 28 production facilities operating across Russia, Ukraine and Belarus.
Danone shares were up 0.2 percent at 44.17 euros by 1458 GMT, against a STOXX Europe 600 food and beverages index .SX3P down 0.35 percent.
(Additional reporting by Dominique Vidalon, Maria Plis; Editing by David Cowell)