Danone exits India joint venture

France's Groupe Danone is selling its equity stake in an India joint venture, Britannia Industries, to its local partners, the Wadia group, ending a relationship that started in 1993 but has been punctuated with problems of late.

The Wadia group will buy Danone's 25.48% holding, which will increase its stake to 50.96%, Britannia informed the National Stock Exchange in a filing on Monday. The valuation at which the deal will be transacted was not disclosed in the filing. The deal is likely to be completed by April 14. The transaction is unlikely to trigger an offer to minority shareholders since transfers of shareholdings between founders of companies are specifically exempt from general offer provisions under the Indian Takeover Code as long as they comply with pricing guidelines.

Danone, a food and beverage giant best known for its dairy products, acquired a stake in Britannia in 1993 and until June 30, 2006 the French company was consolidating the investment into its earnings. But in the second half of 2006, Britannia's board of directors informed Danone that as Britannia is listed it cannot share financial information that is not simultaneously communicated to all shareholders. The timetable of Britannia's results did not coincide with Danone's, so Danone started showing the Britannia investment at fair value, based on the price at which Britannia trades. As of the end of 2006, the first year of the change, the Britannia investment was valued at €114 million ($151 million) in Danone's books.

Today, Danone's stake in Britannia is valued at Rs8.69 billion ($173 million), based on Britannia's closing price on Friday, April 3 -- the last trading day before the stock exchange was informed of the deal.

India's takeover code stipulates that the price at which a deal between founders is transacted has to be the higher of the six-month average or the two-week average share price and also that the buyer can pay the seller a 25% premium to this price if the seller agrees to a non-compete. Media has reported that the deal will be done at a valuation of around $200 million and that an ICICI Bank-led consortium will provide financing to the Wadias to buy the shares.

Britannia is well-known in India for its biscuits and has an estimated market share of around 38% in the segment. Its brands include Tiger, Good Day, Bourbon and others. Tiger is its biggest brand and accounts for around 20% of the company's revenue. The Tiger brand has been a source of contention between Britannia and Danone with the Indian company alleging that Danone has violated its intellectual property rights by launching the Tiger brand in Asia without Britannia's consent.

In 2001, Britannia formed a joint venture with Fonterra Co-operative Group of New Zealand, the world's largest milk company, to explore the potential for dairy products.

In 2007, Danone sold its global biscuit business to Kraft Foods for €5.3 billion, enabling the American company to add the portfolio to its Nabisco cookies and crackers. The deal did not include Danone's equity interest in Britannia and led to speculation about the future of this investment.

Danone earlier decided to go it alone for its launch of Evian bottled water in India, setting up a 100%-owned subsidiary. In 2005 it entered a joint venture with Japan's Yakult Honsha to manufacture and market probiotic products in India. In December 2007 the partners launched a probiotic health drink.

For Danone, the dissolution of the India joint venture follows the problems it is having in China with its joint venture partner, Wahaha Group. Danone has alleged that Wahaha Group is using Wahaha-related trademarks in violation of the joint venture agreement the two partners inked in 1996. Danone has been trying unsuccessfully to buy out Wahaha's stake in the JV. After spending 2007 in legal battles reaching as far as Stockholm and the US, the partners agreed in December 2007 to "finish antagonism and return to peace talks".

Danone's exit from its India joint venture is potentially a win-win for both parties. Danone no longer has an interest in biscuits globally, thus Britannia's core business is no longer of interest to the French firm. Both Danone and the Wadia group have spent valuable management time in courts and they can now more profitably devote resources to growing their respective India businesses.