How Nestlé and Danone spoon-feed investors

Switzerland’s Nestlé and France’s Danone have always been the best of rivals in the food business. Until the beginning of this year, Danone seems to have had the edge over its larger competitor, with investors considering the French group more nimble and innovative than its stolid Swiss neighbour.

Even Nestlé appears to have reluctantly admitted as much. This year, the Swiss company put all its chilled dairy product business into a joint venture with a French partner, Lactalis, in a tacit admission that it could not compete against Danone’s dominance in yoghurts, despite its size.

Yet investor perceptions seem to be changing of late. Nestlé shares have been climbing, gaining about 20 per cent since January, while Danone’s have fallen by about 2.5 per cent. In part, this reflects a belated recognition on the part of the investment community of the successful transformation of the chocolate and Nescafé maker into what its chairman Peter Brabeck calls “the world’s leading nutrition, health and wellness company”.

As part of this process, Nestlé this week completed its €4.1bn acquisition of Gerber, the biggest baby food maker in the US. It paid a pretty full price to its fellow Swiss pharmaceutical group Novartis for this business, as it did last year when it acquired Novartis’s clinical nutrition activities. But baby food commands some of the best margins in the food sector and has promising growth prospects.

Danone’s response was to pay an even fuller price for Numico, the Dutch baby-food manufacturer. Danone justified the €12.3bn acquisition by saying Numico had better margins than Gerber, and the fact it had bagged a good price for the lower-margin biscuit business it sold to Kraft. Nonetheless, investors and analysts felt the French had overpaid. That, combined with Danone’s problems with its Chinese partner, have hardly boosted confidence.

Last but not least, the Numico acquisition has reversed the takeover premium Danone has been fetching ever since rumours started circulating two years ago of a possible interest by PepsiCo.

Safran touch

Since the merger of the French Snecma aero engine manufacturer and the defence and communication group Sagem two years ago, Safran has been undermined by internal warfare. The rival Snecma and Sagem clans have been at each other’s throats and the company has languished.

But there are signs the feuding might finally be over with the arrival this week of a new chief executive, Jean-Paul Herteman. Although Mr Herteman has spent most of his career with Snecma, he seems to have already won over the former Sagem camp.

He replaces the veteran Jean-Paul Béchat who fought to the very end to stay on as chief executive. Apart from mending bridges inside the company, Mr Herteman’s immediate challenges will be to resolve the enduring problems of the group’s communications and mobile telephone handset businesses. At some stage, both are likely to be axed.

Mr Herteman will then have to consider the next transformational move – a possible alliance or even a merger with Thales, the French defence and electronics group that has long eyed some of Safran’s core activities.

Mercedes versus BMW

Rivalries such as that between Muhammad Ali and Joe Frazier have often led each side to push even harder and show off their best. The contest in the automotive world between BMW and Mercedes is a classic example. Right now Mercedes is shaming BMW with its over-performance.

BMW has long been the solid and steady performer of the luxury car sector, with margins all could envy. But in recent years it has floundered somewhat, as have its margins.

Meanwhile Mercedes, pushed by parent Daimler, has forgotten its miserable years at the end of the Schrempp era in 2004-05 and is targeting a 10 per cent return on sales – nearly double the level BMW achieved last quarter. Add a shareholder-friendly regime that has spun off bad businesses (Chrysler), closed down others (most of Smart) and returned cash to investors, and it is little wonder that Daimler’s shares have out-performed BMW’s.

BMW, though, has a chance to fight back in true Ali fashion. Its new chief executive, Norbert Reithofer, will unveil his strategy next month. Insiders are playing down how radical it will be, but BMW executives have examined everything from consumer tastes around the world to energy needs for the next two decades. Taboo subjects such as acquisitions are being considered again, although alliances with other carmakers are more probable.

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