Danone may consider selling USD 2.78bn stake in Yakult to help deleverage balance sheet, restructure – sources
21 NOV 2017
Danone debt has ballooned to over USD 20bn
Activist hedge fund Corvex Management reportedly took stake in Danone this August
M&A and ECM bankers have pitched various proposals for years
Danone [BN:FP] may be considering the sale of its 20% stake, equivalent to around USD 2.78bn, in Tokyo-based food and beverage manufacturer Yakult Honsha [TYO:2267] as a means to help deleverage its balance sheet and restructure its operations, sources briefed on the situation said.
Under such a scenario, the most likely option may be a secondary offering and buyback, the first source briefed noted. There may already be moves to this end, he said, declining to elaborate.
It would not be a major surprise if this deal finally moves forward, the sources briefed said, noting that a potential sale of Danone’s stake in Yakult had been talked about for years. This news service first reported in 2015 that various strategics had been pitched on Danone’s minority stake in Yakult, but few saw merit in such a transaction.
ECM bankers also said they have pitched various proposals to Danone over the years.
The second source briefed noted that Danone is now reorganizing its operations globally and is also afraid of pressure from activist funds. In August this year, NY-based activist hedge fund Corvex Management had reportedly built up a stake worth about USD 400m in Danone.
A source familiar with the situation noted that Yakult was aware that Danone may be in the midst of a difficult situation following its acquisition of Denver-based organic dairy products supplier WhiteWave, and that a potential sale of the Yakult stake could be on the cards. Last year, Danone acquired WhiteWave for USD 12.5bn, including debt. Danone reported net debt of EUR 18.2bn (USD 21.3bn) as of 30 June 2017, up EUR 10.7bn from 31 December 2016 mainly due to the closing of the WhiteWave acquisition, as announced.
A third source briefed on Danone’s strategy noted that the acquisition of the minority stake in Yakult was generally regarded as a failure as the French company did not manage to take control. However, it is a well-performing asset that has done fantastic in the market in terms of stock price, he noted, adding that given Danone’s debt situation, it should benefit from the sale of the 20% stake. That said, it seems Danone management is thinking about selling non-core assets, such as small divestitures from WhiteWave, the third source continued.
A France-based sector analyst covering Danone noted that the stake disposal “definitely makes sense” as it desperately needs to deleverage as a result of its WhiteWave acquisition. It is better for Danone to consider non-core asset disposals to raise funds and deleverage as opposed to divesting an underperforming department like its Evian water business, which is actually key for Danone, the analyst said.
Meanwhile, the source familiar with the situation noted that there had been a strategic meeting at Evian with Danone and its subsidiaries in October this year. There, Yakult and Danone had confirmed they would stick to the stand-still agreement signed in April 2013, in which Danone is free to raise or reduce its stake in Yakult, but that the two sides would maintain a mutually beneficial and supportive relationship in carrying out research activities on probiotic products, he said.
“If Danone sells its stake in Yakult, it would cause a drastic fall in Yakult’s share price,” the source familiar said, adding that the Japanese company is concerned about this potential scenario. The disposal would cause a huge dilution of Yakult’s stock and existing shareholders will surely be unhappy. Yakult’s share price has risen as much as 70% year-to-date and there are many shareholders who bought shares at a very high price, the source familiar noted.
Danone and Yakult are the only companies in the world that are capable of leading the probiotics product market, the source familiar said. Eventually, the likes of Nestle [VTX:NESN] and others will catch up, but Danone or Yakult cannot pull out so easily, the source familiar noted.
Even if Danone decides to sell its stake in Yakult, it is likely the two companies will still continue to work together, the source familiar said. Developing the field of probiotics together was the dream of Yakult’s former chairman Sumiya Hori and Danone’s former chairman Franck Riboud, but the French major’s new chairman Emmanuel Faber seems to be more of a man of accounting, the source familiar noted.
The disposal of Danone’s 20% stake would be a daunting task, one which would require Yakult to buy back its shares, the source familiar said. Yakult may need to buy back as much as JPY 100bn, but such a sizeable buyback will not be allowed by law given the size of Yakult’s capital, the source familiar noted.
It was previously reported by this news service that under Japanese company law, there are restrictions on how much a company can buy back. Under the law, the amount of dividends distributable and potential share buybacks should not exceed the amount of retained earnings minus the book value of treasury shares, cancellation of treasury shares and numerous other factors, it noted.
Danone and Yakult declined to comment.