Water charge batters Danone profits

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Another write-down charge hits French firm Danone, taking the gloss
off a rise in dairy and beverage sales, as rumours of a take-over
bid by PepsiCo subside, reports Chris Mercer.

Danone said it was already in advanced talks to sell its troublesome water cooler joint-venture in the US, which was the main reason for half-year profits crashing from €636m to €445m.

The story was a repeat of the group's 2004 performance when a write-down on the same business saw profits tumble by 62 per cent.

Despite this, Danone's like-for-like sales increased by around six per cent as predicted in the first half, mainly thanks to decent performances in dairy and beverages offsetting a drop in biscuit and cereal products.

Underlying profits rose from €468m to €503m.

The firm was pressured by the rising cost of plastic, mainly PET bottles, and beverage operating margins dropped three per cent. Yet, margins held steady overall.

Meanwhile, Danone's results have coincided with an apparent climb-down in speculation that it may be subject to a hostile takeover bid by US giant PepsiCo.

A report in yesterday's Financial Times​ said PepsiCo had brought in investment banks Morgan Stanley and UBS to advise it on a possible bid for the French bottled water, yoghurt and biscuits group.

The rumours sent Danone's shares soaring, but these have since fallen dramatically overnight to around €89.60 this morning. And Danone chairman Franck Riboud said in an interview published today by Les Echos​ that PepsiCo had made no approach, yet the company was taking the rumours seriously.

One analyst at Pereire Tod​ told DairyReporter.com​ that he thought the French government would make it extremely difficult for PepsiCo to succeed should it launch a bid. "There will be ways and means,"​ he said.

Senior French politicians have fiercely criticised the prospect of a PepsiCo bid in the last few days, with prime minister Dominique de Villepin pledging to defend Danone as one France's industrial "jewels"​.

One option may be to put pressure on various institutional investors, who reportedly own almost 30 per cent of Danone's shares and could piece together an alliance to head-off PepsiCo; something that has reportedly been done in other cases before.

Nestlé has been touted as a possible 'white knight' that could keep Danone European, but some analysts rejected this, arguing the European Commission would never allow Nestlé to build up such market concentration.

In France alone, the Swiss food firm could control 90 per cent of the baby food market, 50 per cent of yoghurt and near enough all the biggest bottled water brands, if it swooped for Danone.

Danone has a current market value of about €23bn.

If PepsiCo were to bid successfully, it would mark one of the largest deals so far this year in the food and beverage industry. Companies are increasingly jockeying for position in a highly competitive market characterised by low margins and cost cutting; mainly driven by higher raw material prices and retailer pressure.

In a research note, analysts at Dryden Financial​ stated that Danone's bottled water and yoghurt businesses offer PepsiCo a high growth segment to its business.

Groupe Danone is the world's largest dairy products maker the second largest bottled water producer. PepsiCo makes Frito-Lay crisps and Tropicana fruit juices in addition to its core soft drinks business.

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