Through The Fly's Eyes: Kraft and Danone

from Catherine Horner of Theflyonthewall.com











Kraft's Got a Big Appetite for Biscuits

Kraft Foods Inc. (KFT) seems to be becoming something of a cookie monster. It’s already the world's largest cookie maker, well-known for its Oreo and Chips Ahoy! Cookies, and Ritz Crackers. However, after today's bid for Danone's (DA) biscuit unit, Kraft is hoping to spread its name across the pond. Kraft's acquisition of Danone's cookie division, which includes the LU, Prince, and Tuc brands, will give Kraft a stronger foothold in Europe as well as in emerging markets such as Indonesia and Malaysia. The deal will double Kraft's size in China and will be vital in Eastern Europe and Russia, where Danone is the market share leader. Danone's stakes in India and Latin America, however, will not be included in the deal.

This move is a clear indicator that "Kraft wants to become the indisputable leader in the biscuit market," for which "they need the operations in Europe, where they are now weak" states Alain Crouzat at Montsegur Finance. So hungry is Kraft to expand its international business that their $7.2B offer made this morning greatly exceeds the projected $3.5B, and more than doubles Danone's $2.2B in biscuit sales for last year. In light of the deal, shares of Danone have leaped to a four month high while Kraft hit a multi-year high of $36.74 in mid-June, but has been unstable in July, trading up at the close on Monday but falling 50 cents in early trading this morning.

While it is clear that Kraft stands to increase its already significant consumer base, Danone also hopes to see growth in the near future. Chairman Franck Riboud stated in a recent BBC report that "this transaction will give the [Danone] group an opportunity to focus... on the rapid expansion of its activities in two health-related areas: fresh dairy products and beverages based on source and mineral water." The deal is expected to be finalized before the end of 2007 and it appears both companies will see positive results.