Rumors of PepsiCo's bid for Danone gain substance

US-based PepsiCo has engaged investment banks Morgan Stanley and
UBS to advise on a possible takeover of Danone, the French bottled
water, yoghurt and biscuits group, according to a report today
inthe Financial Times.

Danone is being advised by Lazard, according to the UK newspaper, which quoted unnamed sources in the story. If true, the report marks the first sign the week-old rumors about the takeover havesubstance.

The takeover, if it occurs, would mark one of the largest deals so far this year in the food and beverage industry, as companies jockey for position in a highly competitive market characterised bylow margins and cost cutting.

US companies, such as Cargill, have recently been expanding their business in Europe, either organically or through acquisitions. Last month US ketchup giant HJ Heinz became the number one saucecompany in the UK by acquiring a raft of leading sauce brands from Danone.

In a general commentary on industry activity in the US and Europe, Deloitte Touche Tohmatsu stated that companies have exhausted cost-cutting as a way to grow their top lines and are turning againto mergers and acquisitions. PepsiCo and Danone are among the top 20 food and beverage companies in the world, as ranked by sales.

Both Danone​ and PepsiCo have so far refused to confirm or deny the rumors about a takeover. The rumors have sparked investor interest in Danone'sstock, which rose by another 14 per cent on Tuesday. Danone has a current market value of about €23bn. PepsiCo was forced to issue a denial on 6 July contradicting a news report it had alreadyacquired three per cent of Danone's stock.

Groupe Danone is the world's largest dairy products maker the second largest bottled water producer. PepsiCo makes Fritos chips and other snack foods in addition to its core soft drinks business.The yoghurts segment is in one of the fastest-growing businesses in the dairy sector.

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. Dryden Financial also expects Nestleto also make a friendly bid for Danone.

Meanwhile analysts at ZKB say Nestle would not be interested in. Danone's weakly developing cookie business. There would also be regulatory problems in the EU due to anti-trust concerns overcombining the two companies' bottled water units.

Danone is due to issue its half year report tomorrow. Quoting analysts Bloomberg news reported today that the company is due post a 4.3 profit increase based on demand for drinks in Asia and yoghurtin Europe.

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