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DuPont’s Danisco buy boosts probiotics and could spur further acquisitions

By Shane Starling , 14-Jan-2011
Last updated on 14-Jan-2011 at 13:52 GMT

Will DuPont's Danisco purchase provoke other probiotic takeover activity?
Will DuPont's Danisco purchase provoke other probiotic takeover activity?

DuPont’s €4.9bn acquisition of Danish probiotics and sweeteners specialist Danisco this week is vindication of the increasing economic viability of functional foods, according to analysts.

In particular, given Danisco is the world’s biggest probiotic player, the sector that is in the midst of an enormous struggle to have its science accepted by the European Food Safety Authority (EFSA), will be boosted by DuPont’s investment, which may spur investment in competitors in Europe and China.

The effects are already being felt by Chr Hansen, the other Danish probiotics giant, which saw its NASDAQ-listed stock jump a couple of percentage points on the back of Monday’s announcement of the DuPont-Danisco deal.

It also announced this week that it was upgrading its 2010/11 growth outlook by a couple of percentage points to 11-13 per cent, even as the company’s main investor, PAI partners, cut its stake to 37.4 per cent from 55.6 per cent.

With speculation rampant about further acquisitions, Chr Hansen said it is unlikely it will itself become a target, especially given its NASDAQ listing only occurred in June, 2010, meaning a likely increased buy-out premium if such an event occurred. Not that that was a factor for DuPont whose €86 a share offer for Danisco represented a near doubling of the company’s share price of 12 months previous, and an EBITDA multiple of 12.8.

China-Biotics next?

One analyst speculated that its acquisition by DuPont meant Danisco had in effect been handed a limitless war chest to seek further acquisitions of its own.

Writing on the investment website Seeking Alpha, analyst Sean Wright said China’s biggest bulk probiotics supplier, China-Biotics (CHBT), a company that Danisco has worked with in the past, was a likely target if Danisco was to tap any investment fund it now had at its disposal.

“Normally when a competitor gets bought at a much higher valuation, a whole industry tends to move up in valuation,” Wright wrote, noting that the Chinese company’s relative anonymity on western markets meant its stock had not risen on the back of the Danisco buy-out, thereby adding to its attractiveness.

“We know that Danisco has a strong position in the bulk probiotics market in China, but no local production and that it imports all of its product. We know that CHBT has the largest stand-alone probiotics facility in the world and is the only Chinese player with the ability to produce bulk probiotics at the same quality standard as Danisco and Chr Hansen. We also know that CHBT’s bulk business is growing very quickly, now with over 50 customers, and taking market share from Danisco and Chr Hansen.”

He said a buy-out made better sense than a joint venture due to competitive and proprietary reasons.

“Danisco knows it needs to be on the ground in China, and it knows it needs a local manufacturing base. China is after all the world’s fastest growing economy and is home to 1.3 billion persons of which 90 per cent are lactose intolerant and need probiotics in order to consume dairy protein comfortably. The potential is huge. Dairy consumption is taking off in China as wealth grows and probiotics should be a fantastic growth business for at least the next decade.”

He added: “Danisco was already adequately capitalised, but now as a part of DuPont it has a virtually unlimited war chest. The longer Danisco or Chr Hansen waits to buy this company, the more expensive the deal will be because the growth will not stop.”

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