18 June 2010
Financial Times publishes Dimitry Afanasiev’s commentary on Danone merging its Russian dairy business with Unimilk

Financial Times

Danone Merges Russian Dairies

By Courtney Weaver in Moscow

Danone, the French dairy products group, is to merge its Russian dairy business with Unimilk, the country’s second-biggest producer, in a “strategic move” that will create a market leader with €1.5bn ($1.9bn) in annual sales.

The world’s largest dairy producer and Unimilk will invest $500m in the venture over the next five years. It will also incorporate the groups’ businesses in Ukraine, Belarus and Kazakhstan. The new entity will have a 21 per cent share of the Russia and CIS dairy market.

Franck Riboud, Danone’s chairman and chief executive, said the creation of Danone-Unimilk represented a “strategic move for Danone in a region which is offering a promise of growth in the years ahead.”

The French group’s emerging market ventures currently account for 45 per cent of its total sales.

Danone, which will take a 57.5 per cent stake in the new entity, said it expected the deal to be completed by the end of the year and begin improving its earnings per share in 2011.

While the deal is expected to create synergies between the two groups thanks to their focus on different segments of the Russian dairy market, the transaction will initially saddle Danone with €1.3bn in debt, mainly because of the put option the group will need to offer Unimilk minority investors.

The joint entity will not achieve Danone Russia’s current operating margin until 2013.

But Simon Marshall-Lockyer, an analyst at Jefferies in London, said the deal would eventually prove profitable for Danone given Unimilk’s well-established production links.

“Unimilk doesn’t have a lot of value-added products . . . but what Danone needs is a lot of capacity to roll out products,” he said.

Mr Marshall-Lockyer said the deal made Danone more likely to sell its 18 per cent stake in the New York-listed Wimm-Bill-Dann, the current largest dairy producer in Russia.

Marina Balabanova, a spokeswoman for Danone in Moscow, said the company was considering selling the stake but that it would be a separate process from the Unimilk deal.

The merger will also give Danone access to sales of traditional Russian dairy staples, such as kefir, a fermented milk drink, and tvorog, a kind of cottage cheese.

“The traditional dairy markets in Russia are strong and it’s smart for Danone to develop its stronghold in the segment by merging their Russian assets with Unimilk’s,” said Dmitry Afanasiev, chairman of Egorov, Puginsky, Afanasiev & Partners and an adviser on the deal.

He said Danone was one of many foreign companies that were looking to Russia’s food, retail and consumer groups sectors for mergers and acquisitions. “That’s where the growth is going to happen,” he said.

The deal was signed at the St Petersburg International Economic Forum where Christine Lagarde, France’s finance minister, and Viktor Zubkov, Russia’s first deputy prime minister, backed the venture.

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