6 takeaways from the Danone-WhiteWave takeover deal
Industry consolidation struck again this week when Danone announced it had agreed to acquire WhiteWave Foods, purveyor of plant-based products, premium and organic dairy, and fresh packaged produce. The deal's value stands at $56.25 per share in cash, equal to about $12.5 billion, including debt and other WhiteWave liabilities.
While analysts have long speculated that WhiteWave could be a purchase target, an international company like Danone is an enticing buyer. The implications of this deal stretch beyond the two companies themselves and well into fast-growing niche categories that both now lead.
Danone: International leader finds growth (and conflict) in unexpected places
Danone emerges as an unexpected leader in the plant-based foods and beverages space
For some, it may not have been a shock that a major manufacturer would eventually buy up WhiteWave, one of the few large food and beverage manufacturers posting sizable growth in consecutive quarters as many others flat-line. But Danone's purchase may have been less obvious.
Danone’s brands have mainly spanned fresh dairy, water, medical nutrition, and baby nutrition. These products already have a health-centric positioning, which makes the pivot to premium and organic dairy and plant-based foods, less of a challenge than other manufacturers may have faced.
By acquiring WhiteWave and combining the company with its own operational and R&D capabilities and investments, Danone could help WhiteWave expand its plant-based products further and at a faster rate.
"Evolving usage occasions (e.g. increasing use of plant milks in applications outside the cereal bowl, plant-based dessert products, plant-based and non-traditional yogurts like Wallaby) are another sign of future growth potential for the category as a whole," Zain Akbari, an equity research analyst at Morningstar, told Food Dive.
Danone could transition or expand more of its existing brands into the premium, organic, and plant-based markets
With this deal, Danone and WhiteWave open up their supply chains to each other, offering a wealth of opportunities for product development and reformulation, and the cost-effective scaling of smaller brands.
"There should be procurement synergies, limited to some extent by the different nature of the natural, organic, and GMO-free supply chains relative to their conventional counterparts," said Akbari.
With access to WhiteWave’s supplier relationships, Danone could easily and economically source certain "better-for-you" ingredients to use for its own existing brands. At the same time, with Danone increasing total orders made to WhiteWave’s suppliers, WhiteWave could also benefit from better bulk pricing on these ingredients. That could bolster profitability and free up additional capital for marketing, distribution and R&D.
"It is very possible that there will be brand partnerships, and I certainly see R&D leverage across the combined portfolio, so the leverage may be a bit more 'behind the scenes' than brand partnerships," Philip Gorham, a senior equity analyst at Morningstar, told Food Dive.
Danone may struggle internally with conflicts of interest
As a major international conventional dairy producer, particularly in the yogurt space, Danone may have some integration and operational issues, which have been common as more manufacturers acquire "better-for-you" brands. For example, companies such as General Mills and Unilever have been vocal supporters of GMO ingredients, while internally, brands like Annie’s and Ben and Jerry’s, respectively, have actively spoken out against GMOs.
Even Danone isn’t entirely new to this realm of internal conflict with brands like Stonyfield Organic, which has been an avid supporter of mandatory GMO labeling. In April, Danone’s Dannon unit announced certain brands would be non-GMO beginning July 2016, and remaining products would have GMO labels nationwide by December 2017.
But in this case, the conflict comes as Danone has to balance its conventional dairy brands, like Dannon and Activia, with plant-based brands, such as Silk, and premium and organic brands like Wallaby and Horizon.
"In this particular situation, where an international conventional dairy-based food company is buying a company that is a leader in both organic dairy and non-dairy products, it also gives me some pause for concern, given the obvious competing interests," Michele Simon, executive director at the Plant Based Foods Association, told Food Dive.
Where this could become troubling is on a political stage. The Senate passed a national mandatory GMO labeling standard this week, and the bill is on its way to the House for approval. But plant-based producers have only recently established an official lobbying voice with the formation of the Plant Based Foods Association in March. When political issues arise that could threaten either conventional dairy, plant-based foods or organic dairy, Danone may find its brands on competing sides of the issue.
"It’s too soon to tell how this will play out both internally within the company and in the political arena, where we really need to be pushing for government policies to support the growing plant-based foods sector," said Simon.
WhiteWave: Fast-growing company and its high-performing niches set to take flight
WhiteWave could hit the distribution jackpot
WhiteWave is by no means a small company, as the fourth-largest U.S. dairy manufacturer and a leader in the plant-based products space. Its acquisitive growth has paid off, driving revenue from high single-digit organic growth to double-digits overall and more than $1 billion in revenue in multiple recent quarters.
But the company had hit a point where growing to the next tier of market prevalence beyond the U.S. may have necessitated a cash infusion or other investment. This buyout may have been the next best thing. Even with the necessary capital, instead of having to grow on its own, WhiteWave can piggyback on Danone’s existing network to "enter new geographies and expand penetration," said Akbari.
China could be a particularly promising market. WhiteWave could expand its Silk brand using Danone’s existing distribution network to penetrate a non-dairy milk alternative market that is ten times the size of the U.S., Euromonitor food analyst Lianne van den Bos noted in a blog post this week.
What’s more, Danone has been struggling in China, which remains a volatile market. WhiteWave’s presence there could also provide stability for the company as a whole in that region.
Plant-based products receive further validation in the market — though it may not have been necessary
Danone’s acquisition acts as further endorsement in the plant-based category: A major global market player has demonstrated confidence in the category as a focal point of growth for both WhiteWave and now Danone going forward. But Akbari argues that WhiteWave didn’t need Danone’s vote of confidence to know plant-based products are a movement, not a fad.
"I think the customer ultimately gave WhiteWave their endorsement—their plant-based portfolio has seen strong growth in its core offerings and a highly encouraging reception for its more innovative yogurt and dessert products," Akbari said. "So it’s more about customer driven growth than a need for validation of the category,particularly since WhiteWave’s market cap and reach were already meaningful before the acquisition."
The proof is in the numbers: Revenue for WhiteWave’s Americas plant-based foods and beverages platform soared 29% in the latest reported quarter, which topped 26% growth for the business segment in the prior quarter. Last month, the company revealed an additional $3 billion in sales it had identified as the category continues to grow.
Beyond WhiteWave, the number of global food and beverage product launches bearing a vegetarian claim shot up 60% from 2011 to 2015, and new products making vegan claims have also steadily risen in that timeframe. Plant-based meat and dairy alternatives are driving much of this growth, and various startups have sprung up to meet the market’s increased demand.
"All of this is in response to American consumers leading the charge towards all kinds of plant-based alternative products, driven by a variety of factors ranging from health and wellness to environmental considerations," Jordan Rost, VP of consumer insights at Nielsen, told Food Dive.
Other manufacturers have taken notice, with General Mills’ 301 Inc. investing in companies like plant-based dairy producer Kite Hill and plant-based snacks maker Rhythm Superfoods. But Danone has taken the next step by outright acquiring one of the leaders in this fast-growing space.
WhiteWave can leverage other benefits from Danone’s ownership.
In addition to distribution opportunities and supply chain synergies, Danone has other unique benefits to offer WhiteWave.
"(Danone has) 'category captains' that share category level data with stores in return for local level data, as well as the possibility of influencing shelf space and product placement, a huge informational and competitive advantage over smaller players," said Gorham.
While much has been said of the $300 million in operating profit Danone expects to derive from this deal, Gorham doesn’t believe this is the main draw.
"It is almost always bad news when a competitor becomes bigger, because if greater scale leads to a lower average cost of production, the larger player can have more flexibility to compete on price," said Gorham. "Dairy is very local, however. You just can't source liquid milk and transport it over long distances; it has to be sourced locally. So in this case, the cost advantage would be somewhat limited. What Danone brings to the table, however, is large marketing and R&D budgets and global best practices."
…But it may not be over yet
While this deal seems set, another potential buyer could disrupt Danone’s plans with a higher offer. Analysts’ speculation has put everyone from Nestle and General Mills to Coca-Cola and PepsiCo as companies that could benefit from such an acquisition.
Certain shareholders are less keen on Danone’s offer than the companies themselves have been, with Ampera Capital, a WhiteWave shareholder, calling the offer "grotesquely inadequate" in a letter to WhiteWave’s board Thursday.
Pressure from shareholders has impacted other recent deals and company changes, most recently including Mondelez’s declined bid for Hershey last week, so the battle for WhiteWave may have just begun.