Danone Could Be The Next Serving For Hungry Activists

By Breakingviews

Danone (OTCQX:DANOY, OTCQX:GPDNF) could be the next serving for hungry activists. Low margins and poor shareholder returns mean the Activia yoghurt maker is a logical target. While a 2012 campaign by U.S. activist Nelson Peltz had modest success, Third Point's new stake in Nestlé (OTCPK:NSRGY) and French President Emmanuel Macron's pro-business agenda provide impetus for a fresh look.

At 13.8 percent, Danone's operating margins are among the lowest in the European consumer sector. Total shareholder returns of 50 percent over five years are significantly below those of Unilever (UL) and Reckitt Benckiser (OTCPK:RBGPF), as well as France's benchmark CAC-40 index. That ought to create the ideal conditions for the kind of activist campaign Dan Loeb's Third Point has launched at Nestlé.

There are valid reasons for Danone's lower profitability, including exposure to the challenged European dairy market. But it still posts lower margins in water and infant nutrition than Nestlé manages in the same categories. And while both companies start out with the same 51 percent gross margin - the difference between what they buy and sell - the French group eats up a bigger share of profit through overheads. One culprit is marketing and promotion expenses, which are equivalent to 25 percent of sales.

Danone's patchy track record means that an activist could be useful simply by holding management to account. Chief Executive Emmanuel Faber is already aiming for an operating margin above 16 percent by 2020 through synergies from its acquisition of dairy alternative company WhiteWave and plans to take 1 billion euros of costs from the business.

Low investor confidence is the harder fix. A series of missteps, such as underestimating competitors in the U.S. yogurt market, have undermined trust in management. A sum-of-the-parts valuation by Exane analysts puts the share price a fifth higher than current levels. And while Trian Partners, the investment company of Nelson Peltz, persuaded Danone to announce 200 million euros of cost cuts from its European operations in 2012, he cashed out in the low 60s rather than the 78 euro target he originally thought achievable. Margins are now lower than at the outset of his campaign.

There's a problem, of course: this is France. The threat of government intervention saw off a potential approach from PepsiCo (PEP) more than a decade ago, effectively branding Danone as unassailable, at least to a takeover bid. Still, new President Emmanuel Macron's pro-business stance may signal a change. After all, what better way to show French companies are listening to good ideas - even when they come uninvited.

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