You really have to wonder what Group Danone (OTC BB: GDNNY.PK) is up to with its purchase of Dutch baby-food and nutritional food maker Numico.
Numico is a healthy, growing business generating consistent cash flows and has done well since restructuring itself a few years ago. It would greatly improve Danone's position in nutritional foods, where Nestle, Bristol-Myers Squibb (NYSE:BMY), and Abbott Laboratories (NYSE:ABT) have strong positions.
Still, we're talking about a 45 multiple to free cash flow and in the neighborhood of 18 times EBITDA (earnings before interest, taxes, depreciation, and amortization) for a boost in a market with plenty of healthy competitors. It's tough to justify such multiples without a competitive advantage that provides plenty of long-term growth, and it doesn't appear there is one here.
One interesting idea I've seen floating around in The Wall Street Journal and elsewhere is that Danone is simply looking to get larger to remain independent. PepsiCo (NYSE:PEP) has been rumored for a couple of years to be in the hunt for Danone, and I suppose simply getting bigger is a way to keep a suitor at bay for a little while. Trouble is, in the long term, shareholders tend to react unkindly to poor capital allocation decisions. A future punishment of the shares might just make Danone cheaper for Pepsi or another suitor.
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Nathan Parmelee had no financial interest in any of the companies mentioned at the time of publication. The Motley Fool has an ironclad disclosure policy.
