Danone: Stock Price Down, But Still at Risk

Stock price: €37
Conclusion: Stock down 6.5%, but still at risk.

Rights issue of approximately €3bn

Danone (DA) announced its intention to raise €3bn of equity capital through a Right issue in order to optimise the capital structure of the company. The CFO estimated the dilutive impact at around 10%. Net debt will come down from €10.3bn to €7,3bn, implying 2,6x EBITDA vs 3,7x before the right issue.
Management stressed that there is no immediate plan to buy back minorities in Spain (valuation range estimated between €2-2.4bn) following the death of Daniel Carasso. Management reiterated guidance for 2009, adjusted for forex and excluding the right issue.

We said in our last comment that the stock was fully priced at €37,4 (April,16).
Notwithstanding Tuesday’s fall , we are still seeing further downside risk.

First, we feel that the current difficulties of Danone Spain might incite minority shareholders to exercise their put options, which would leave little room to maneuver for bolt-on acquisitions.

Second, we wonder whether reiterating a guidance of 10% in EPS this year, but adjusted for currency impact and also excluding the right issue still makes sense for shareholders!

Third, we think the mid-term guidance of 8-10% underlying growth coupled with margin progression becomes increasingly questionable at a time when management looks for a durable economic downturn. We believe that 2010 guidance might be, again, below target.

In conclusion, 14.2x P/E and 8.6x EBITDA looks expensive in light of the lower EPS growth visibility.