Negotiations to sell the Russian holding Wimm-Bill-Dann to the French company Danone are finally over after two long years. The market heard this news with relief.

Anastasia Matveeva, Antonina Sidorova

Rumors that Russia’s biggest manufacturer of dairy products was going to be sold to the French company Danone have been troubling the market for the last two years. The most recent round came in early October when The Financial Times, quoting reliable sources, reported that the Russian company was about to go to the French. By the end of November, the two parties announced that negotiations were over. No reasons were given for this decision.

Hold the water, hold the juice

Danone demonstrated its interest in the shares of its direct competitor on the Russian market even before WBD was listed on the New York Stock Exchange (NYSE) in February 2002. Danone bought 4% of the initial public offering and then increased its stake to 6.24%. The French investors were interested in company’s controlling stake and began negotiating at that time with WBD’s major shareholders. 
 Without a doubt the French company stood to benefit from control over the successful Russian manufacturer of dairy products. However, from their own point of view, the object of their interest had one substantial fault. In addition to milk, yoghurt, and fruit-flavored farmer’s cheese, WBD produces juices and bottled water. It would be easier for Danone to buy just the dairy portion of the Russian corporation, as restructuring the multifaceted producer’s assets would have meant additional costs for the French company. WBD’s diversification only decreased its value in the eyes of its potential purchasers.
There was another factor reducing WBD’s value. Actual results for the first three quarters of 2003 did not achieved projected levels. Total sales for the first nine month of this year grew by less than 10%. Observers attributed weak juice sales to a cold summer, while data from marketing agencies demonstrated that WBD’s competitors in the juice segment, Nidan and Lebedyansky, had increased their market shares.
Dairy sales grew at the same rate as the market, but analysts were troubled by WBD’s pricing policy, as prices did not keep up with inflation. Keeping prices low has a negative effect on a company’s capitalization for those operating on consumer markets. Things went so far as to make analysts skeptical whether WBD would be able to make the billion in turnover projected for 2003. In addition, WBD’s investment plans were cause for anxiety. Over the last several years, the holding has grown due to its acquisition of other companies already in operation, the majority of which demanded significant updating. The result of this practice is a decline in profitability.
The last straw was the YUKOS Scandal. “Danone announced via The Financial Times at the end of October that negotiations had been suspended. I personally interpreted this move as an attempt to take advantage of the situation,” says Marat Ibragimov, an analyst at Prospekt Investment Company. In other words, Danone decided to get a better price.

We don’t really feel like it

Those at WBD don’t see any reason to give into French pressure. The majority of analysts also agree that this isn’t the best time to sell the Russian holding. Its current financial results are weak, but it has potential to grow.
“The company is still growing. The production facilities it purchased have not been fully taken over and not all outdated equipment has been replaced. WBD will be able to take full advantage of its growth potential only in two years or so,” believes Yana Gavrilko, an analyst at NIKoil. Alexei Krivoshapko, an analyst at United Financial Group, agrees: “I think that what happened to the company this year is the worst that will happen. In the future, things will only improve. WBD is operating on solid, expanding markets. It is in the process of realigning its sales system. Its efficiency is naturally low, but this is the history of its long, but good, reconstruction.”
Overall, analysts predict that in a year or two, a WBD share will cost $26 (this year, even at the peak of investor interest, its price did not rise above $24). Thus, selling the company would only make sense if the purchaser took this potential into account when naming the price.
Furthermore, WBD is likely not very happy with Danone’s desire to buy only part of the company. This would bring about particular difficulties, as juices and milk are packaged at the same facilities. There would have to be a division, which would mean that only the brand names would be left of the company’s juice production. It is hard to imagine that someone would buy these brands for the same price as a manufacturing facility in operation.
Apparently, the position of WBD managers also played a role in breaking off the negotiations. They intended after selling their shares to stay in the driver’s seat at the company and believed they had excellent chances of achieving this aim. As the company’s directors have many regional contacts, Danone would have been forced to keep them on for a while. In the course of the negotiations, questions about how they would share control and what powers the old managers would have arose nonetheless.
At the same time, the market reacted positively to the news that the negotiations between Danone and WBD had broken off. The ADR quotes for WBD rose by 2.5-3% immediately after the announcement. Analysts think this is entirely logical. By rejecting Danone’s conditions, the major shareholders at WBD are demonstrating that they see a future for the company’s independent development without attracting a strategic investor.
According to Tatiana Kobrina at Olma IF, WBD’s decision not to sell is also good news for other manufacturers in the industry. If the deal had gone through, the new configuration would have had a monopoly on the yoghurt and enriched milk market.

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