CHICAGO – U.S. food giant H.J. Heinz (HNZ) has agreed to buy Danone's UK-based HP Foods (search) business for about $855 million in a deal that puts HP and Lea & Perrins (search) sauces under the same roof as its own Heinz Ketchup.
The cash purchase would help Pittsburgh-based Heinz focus more around core areas like condiments, meals and snacks and infant nutrition, while France's Danone (search) would focus almost exclusively on water, yogurt and biscuits.
Analysts said Heinz was buying a collection of largely UK domestic brands such as HP and Daddies sauces, with only Lea & Perrins Worcestershire sauce a truly global brand.
"It's a highly profitable business and will fit well with Heinz, but it's not a top-notch price because it's not a top notch business," said analyst David Lang at Investec Securities.
Danone's shares were off 0.948 percent at 73.50 euros Monday. Heinz shares were up 13 cents at $36.50 in thin trading Monday from Friday's New York Stock exchange Close.
Heinz said it expected the acquisition to add to earnings in the first full fiscal year and to close in the next few weeks pending all regulatory approvals.
The deal follows on the acquisition of a majority stake in Russian condiments and sauces maker Petrosoyuz as Heinz shifts its focus from an overhaul of its U.S. business to Europe.
Heinz has been hurt in Europe by the growth of deep discount retailers and a portfolio that some analysts say focuses too much on commodity-type products which are hard to differentiate from competitors.
Joe Jimenez, Heinz Eruope's chief executive, said the acquired brands fit well with the company's expertise.
"These are businesses that we know we can grow by applying the same product and packaging innovation that we applied to Heinz ketchup in Europe," Jimenez said in an interview with Reuters.
As talk of the deal surfaced last week, some analysts agreed that the acquisition made sense, but questioned how much Heinz would do with the brands.
"What remains to be seen is whether Heinz has the marketing touch to grow brands once it acquires them," David Nelson, analyst at Credit Suisse First Boston said in a research note late last week. He rates Heinz shares "underperform."
Danone Chief Financial Officer Emmanuel Faber said the HP business had annual sales of 240 million euros ($291.3 million), which meant the purchase price valued the business at 2.5 to 3.0 times sales. The price amounted to 11 times its earnings before interest, depreciation and amortization (EBITDA).
Faber said the cash from the deal and from the sale of a stake in Spanish brewer Mahou would enable the French food company to be more active in share buybacks and that it was on track to hit its targets for 2005.
"We are very confident to deliver what we have targeted for 2005," said Faber, adding that the group would be more active on share buybacks in the second half than in the first half.
Danone, which makes Actimel dairy drinks, Volvic and Evian bottled waters and LU cookies, targets underlying sales growth of 5 percent to 7 percent, an annual rise in operating margins of 20 to 40 basis points and growth in earnings per share of 10 percent.
Danone plans to increase its buybacks to between 600 million and 800 million euros worth of shares in the second half, compared with 500 million so far this year.
The third-biggest food group in Europe after Nestle and Unilever said it expected to book a capital gain of more than 450 million euros in its 2005 accounts from the sale.
The deal gives Heinz three plants, two in England and one in the U.S. including 450 staff as well as a perpetual license to market Amoy Asian sauces and products in Europe.
Heinz fought off a strong field of potential buyers including UK groups Associated British Foods and Premier Foods and also New York-based sauces and spices group McCormick & Co. Inc. (MKC).