Reports that Danone may sell its water division has garnered mixed reactions

Reports that Danone may sell its water division has garnered mixed reactions

Just as Danone's bottled water division has begun its climb to recovery, speculation has surfaced that the Evian producer might dispose of the business. Here, just-drinks speaks to analysts and assesses the firm's strategy.

The report yesterday (9 November) that Danone has entered "early stage" talks with Japanese drinks companies over the sale of its water business has garnered a mixed reaction from the analyst community.

Several company names have been thrown up as possible suitors, including Japanese giants Kirin Holdings, Asahi and Suntory, with the likes of PepsiCo and The Coca-Cola Co waiting in the wings.

It is well-known that the Japanese drinks firms have money and are seeking to reduce their reliance on a stagnant domestic market for soft drinks and beer. Of these, Kirin has the most obvious ties with Danone, having sold its water brands in Japan since 2002.

That said, while suitors might be lining up at the door, it remains unclear whether Danone either wants or needs to sell its water division.

The business has not performed to the best of its ability in the last few years and has been the notable weakspot in Danone's portfolio, due to sluggish demand in Europe and North America. The firm's stronger dairy and baby nutrition businesses have largely eclipsed water.

In the firm's first-half results, Danone's waters division recorded like-for-like sales growth of 4.8%, driven mainly by the emerging markets. In comparison, fresh dairy sales increased by 7.1%, also on a like-for-like basis, and baby nutrition delivered high-single digit growth of 8.6%.

Danone's annual report for 2009 shows that water contributed to 17% of total net sales for the year, versus dairy's contribution of 57% of total sales. Baby nutrition contributed to around 20% of total sales.

Some might conclude that the business is, therefore, not essential. But, Danone has remained insistent that water is an integral piece of the firm's puzzle. In its 2009 annual report, Danone set out its focus for the division - to reap rewards from emerging markets, which account for around 50% of the division's net sales.

One analyst, who declined to be named, told just-drinks that he doubts Danone is interested in relinquishing "a (French) national jewel" such as Evian. "I don't believe it will happen," the analyst said. "Mineral water sits very nicely within Danone's strategic emphasis that its products are beneficial to good health and well being."
He added: "If Danone was considering the sale of its water activities, perhaps the only way it could be justified would be as a means of financing a major acquisition in another market segment but it's difficult to see where."

Credit Suisse Securities (Europe) analyst Charles Mills echoed these sentiments. He told just-drinks that Danone has been averse to disposing of businesses: "[Danone] has seen the shape of the business change consistently for over a decade, the grocery business, cheese business, beer, biscuits have all gone," he said, but added: "Normally a disposal is accompanied by an acquisition, you swap a part of the portfolio.

"So I think the way that the City would look at it is, if Danone is selling [the water business], why is it selling it now particularly, is it because there is something else that they might like to buy?".

Mills said, however, that Danone's beverage business isn't "hugely" important to the group's overall sales and profits.

If Danone were to sell it water division, Kirin is likely to be the frontrunner. The Japanese drinks group has an advantage over other bidders as it formed a joint venture with Danone back in 2002 to market mineral water in Japan.

The initial purpose of the company was to import and market Danone's mineral water brand, Volvic, and sell Kirin's own mineral water brand, but Kirin said at the time that the pair might also look at possible future collaborations outside Japan.

Suntory, for example, bought soft-drink maker Orangina from Blackstone Group last year.

Danone remains tight-lipped on reports of talks with potential buyers. Its reason for selling up does not look compelling at this stage, but what if the Japanese make Danone an offer that it can't refuse?

Additional reporting by Stuart Todd.