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Danone could spend Medical Nutrition cash on baby food, dairy deals

By Dominique Vidalon and Noëlle Mennella

PARIS, March 7 (Reuters) - If French food group Danone decides to sell its slowing medical nutrition business, it is most likely to invest the proceeds in its faster growth baby food and dairy businesses, targeting acquisitions in Asia and Africa.

Reuters reported last month that the world's No 1 yoghurt maker was considering selling the unit which makes tube feeding and other products, which has been under pressure from declining healthcare budgets in Europe.

While Danone has declined to comment, analysts see it spending any proceeds on bolt-on acquisitions where it is achieving higher growth, higher profits or is more dominant.

"A sale of the entire Medical Nutrition business could be a strategic decision if Danone is looking for 5-7 billion euros ($7-10 billion) financial capacity for one or several acquisitions," said Natixis analyst Pierre Tegner.

Bankers and analysts said that if Danone aimed to buy something big it would most likely be Mead Johnson Nutrition (MJN), the maker of Enfamil baby formula, or the baby food assets of Abbott in Latin America. But there was no sign of these assets being available soon.

"They would probably love to do a big acquisition but there are few targets around," said a European banking source, adding Danone had a history of reshuffling its portfolio, having sold beer, glass packaging and biscuit businesses over the years.

Analysts have long said that the whole or part of U.S. based MJN, worth $16 billion, would be a good but expensive fit for Danone, helping it grow in Asia and Latin America.

If Abbott's baby food assets in Latin America came up for sale, Danone would likely want to snap them up. The world No. 2 in baby food lost out to market leader Nestle in a battle for U.S. drugmaker Pfizer's baby food brands in 2012, which gave Nestle dominance of emerging markets.

Abbott, Nestle and Baxter are also among those likely to be interested in buying Danone's Medical Nutrition business. Sources have said German healthcare group Fresenius is considering making an offer.


Danone is trying to reduce its dependence on slow growth Europe and has been expanding in emerging markets, notably China. These markets now make up 40 percent of group sales.

Earlier this month, Danone spent 486 million euros to boost its stake in China's top dairy firm Mengniu Dairy Co to 9.9 percent, as it aims to tap into booming local demand and secure greater control over supply quality in a region which has been hit by food safety scares..

"Danone has big ambitions in China. Long-term it may seek to raise its stake in Mengniu to 40-45 percent. This would need much more funding but be a big growth booster and pull the rug under rivals," said one analyst, who asked to remain anonymous.

Africa is another region Danone has earmarked for growth and where analysts expect acquisitions in the coming months in both dairy and baby food.

Danone is said to be looking at a stake in East Africa's top producer, Brookside Dairy, according to a media report after buying a 49 percent of West Africa's Fan Milk Group last year. It also spent 550 million euros to raise its stake in Morocco's Centrale Laitiere in 2012.

Danone will need also to boost investment in its baby food business in Asia and China to get it back on track after an infant formula recall, prompted by New Zealand supplier Fonterra, which hit sales last year.

Last month Danone said it would overhaul its Dumex brand and launch a new Nutricia brand to revive sales of its infant milk formula which were wiped out in December.

"As Danone is planning to re-launch Dumex as well as introduce the ultra-premium Nutricia range in China, we believe spending will need to be ramped up aggressively," Barclays analysts said in a recent note.

Selling Medical Nutrition, which swallows hefty R&D spending, might also allow a return of cash to shareholders.

"Danone never paid an exceptional dividend," said Christian Jimenez, President of investment fund Diamant Bleu Gestion, adding that a new share buyback plan "might also make sense".

But Kepler Capital analyst Jon Cox was not so sure.

"It's more likely they are going to reinvest in their own business in infant nutrition and dairy rather than giving it back to shareholders," he said.

"They will also use the funds to strengthen the balance sheet and for small bolt-on acquisitions," he added.

Danone's net debt jumped 27 percent to nearly 8 billion euros at the end of 2013 due to acquisitions and the buyout of some minority interests in Danone Spain. The net debt to equity ratio rose to 0.74 times from 0.51 times at the end of 2012, a level however that is no threat to banking covenants.

Whilst dairy and baby foods were seen as the most likely businesses Danone will want to invest any windfall in, it may also boost investment in its thriving water division, which makes flavoured water drinks and contributes 18 percent of group sales. That business grew at an underlying rate of 11.2 percent in 2013, topping the 4.8 percent growth by the group.

"Water is doing well and there are lots of projects. There could be expansion and acquisitions in water and water-related products," the banking source said.