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Investors Cheer Danone's Strong Start To 2022, M&A Talk

Shares in Danone rose over 8% on Wednesday, lifted by a media report of merger interest from French dairy rival Lactalis and stronger than expected first-quarter sales, which reassured investors its revival plan was on track.

Despite the robust start to the year, the maker of Activia yoghurt and Evian water kept its 2022 financial goals unchanged.

Danone's new chief Antoine de Saint-Affrique is pursuing a revival plan amid mounting input costs and uncertainties caused by Russia's invasion of Ukraine, which has forced Danone to suspend investments in Russia.

A report in business daily La Lettre A said unlisted Lactalis has for months been studying a possible full or partial takeover of Danone. Lactalis was not immediately available for comment.

A spokesperson for Danone said it had no plans to sell any of its three main divisions: dairy and plant-based products, infant formula, and bottled water.

Asked about Lactalis's reported interest, Danone finance chief Juergen Esser told analysts, "We are working very actively to fix our under-performing assets. We will update you when there is something new."

At a March investor day, Saint-Affrique said there was "nothing wrong" with Danone's three businesses, and the key to stoking sales growth was to improve execution, invest sufficiently behind the right brands and innovation, as well as parting with underperforming assets in those businesses.

Q1 Sales Beat Forecasts

Danone, which is the world's largest yoghurt maker, said its like-for-like sales rose 7.1% to €6.236 billion ($6.74 billion) in the first quarter, compared with expectations for a 5.5% rise in a company-compiled consensus of 19 analysts.

That reflected favourable year-ago comparables, price increases, stronger demand for baby formula in China, and a post-COVID improvement in demand for water consumed outside of the home. Esser said Danone was ready for "further rounds (of price increases), if needed."

"We won't get too carried away over one good quarter, but this is a creditable start to its new 'Renew Danone' strategy," RBC Europe analysts said.

"Pricing is still the key growth driver. However, better than expected volumes is a good indication of Danone's pricing power and a change from its traditionally underwhelming volume performance," they added.

On the negative side, Oddo analysts noted volumes declined 1.8% in the quarter in the dairy and plant-based division, with supply challenges hurting Spain and the war in Ukraine weighing on volumes in Russia.

Looking Ahead 

Danone expects a 2022 operating margin above 12% against 13.7% in 2021, with price-led like-for-like sales growth in a range of 3% to 5% against 3.4% in 2021.

This assumes the reinvestment of 100% of its Local First savings programme, higher productivity than last year and a 'mid-teens' level of input cost inflation.

Saint-Affrique replaced Emmanuel Faber, who was abruptly ousted as chairman and CEO last year after clashes with some board members over strategy and calls from activist funds for him to resign over the group's lacklustre returns compared with some rivals.

News by Reuters, edited by Donna Ahern, Checkout. For more A-brand stories, click here. Click subscribe to sign up for the Checkout print edition.

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