Danone will convert its 9.8% indirect stake in Mengniu into a direct stake as part of a plan to sell the holding in the Chinese dairy company.
Once the conversion of the indirect stake to a direct stake is approved by regulators, Danone (0KFX) seeks to sell the stake in 2021, through one or several transactions. The French food and beverage company first became a stakeholder in Mengniu in 2013.
Danone’s CFO Juergen Esser told Reuters, “Today’s announcement is an example of our commitment to deliver portfolio optimisation and improve returns to shareholders through disciplined capital allocation.”
The company’s indirect stake in Mengniu has a book value of €850 million and in 2019, the holding contributed €57 million as recurring income from associates. Danone expects to return a majority of the expected proceeds from this transaction to shareholders through a share buyback program.
Danone said in spite of the the move to divest the Mengniu stake, China continues to remain “highly strategic for Danone.”
Last month, the company announced FY20 results and reported that sales fell 6.6% year-on-year to €23.6 billion and recurring operating income was down 13.8% year-on-year to €3.3 billion. (See Danone stock analysis on TipRanks)
Shares of Danone fell 3.6% to close at €56.41 on Feb. 26.
On Feb. 26, Morgan Stanley analyst Pinar Ergun initiated a Hold rating with a price target of €58 on the stock. Ergun said in a research note, “While an undemanding valuation, low expectations and catalysts on the horizon limit the downside risk, Danone will not have a quick or easy time fixing its structural issues.”
The rest of the Street is in line with Ergun’s stock outlook with a Hold consensus rating based on 3 Buys, 6 Holds, and 3 Sells. The average analyst price target of €57.83 implies 2.5% upside potential to current levels.
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