NGUINI Jean-Yves 01/05/2012

BS5 1C

MANAGEMENT

FINAL ASSIGNMENT

ISM-ISEG GROUP

2011/20121

EXECUTIVE SUMMARY

The goal of this assignment is to give a practical approach to risk management in analyzing the Danone Case. In this assignment we must analyze the different risk that DANONE can have and find the best alternatives and solutions to deal with this risk.

For obtain and propose the best solution possible, we are going to use the balance score card and risk score card of DANONE and analyze the financial statements of this company.

After that, we will advise the CEO with regards to the investment banker’s suggestions. Give the pros and cons, and clear arguments supporting your advice.

And for finish we will explain what impact the investment banker’s suggestions and your advice could have on the share price (similar if you agree with the investment banker).

DANONE is a major player in the global food industry, with a turnover of 12.8 billion Euros in 2007. It operates in three markets corresponding to its three business segments: dairy products fresh water and baby food and medical nutrition.

He holds leadership positions in many countries with a strong presence, particularly in American, European, African and Asian markets.

a strategy International recently strengthened by the acquisition of Dutch NUMICO, havingled to a sharp increase in sales outside Western Europe.

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SUMMARY

A- DANONE PRESENTATION

1) DANONE HISTORY………………………………………………………………………………………………….42) GROUP BUSINESS…………………………………………………………………………………………………..53) DANONE STRATEGY……………………………………………………………………………………………...64) BRAND POSITIONING STATEMENT……….………………………………………………………….…….85) FAST-MOVING CONSUMER GOODS COMPETITIVES FORCES…………………………………..86) VALU CHAIN……………………………………………………………………………………………………………9

B- RISK MEASUREMENT

1) BALANCE SCORE CARD…………………………………………………………………………………………….92) RISK SCORE CARD……………………………………………………………………………………………………103) THE INVESTMENT POLICY AND INVESTMENT CHOICES…………………………………………...154) DEBT POLICY……………………………………………………………………………………………………………155) THE ACTION MARKET VALUE AND ITS BOOK VALUE………………………………………………16

C-BANKER SUGGESTION AND RISK OFFICER ADVICES TO THE CEO………………………………………17

CONCLUSION…………………………………………………………...………………………………………………;………..19

BIBLIOGRAPHY…………………………………………………………………………………………………………………….20

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A-BRIEF DANONE PRESENTATION

1) DANONE HISTORY

DANONE is a major player in the global food industry, with aturnover of 12.8 billion Euros in 2007. It operates in three markets corresponding to its three business segments: dairy productsfresh water and baby food and medical nutrition. He holds leadership positions in many countries with a strong presence, particularly in American, European, African and Asian markets; a strategy International recently strengthened by the acquisition of Dutch NUMICO, having led to a sharp increase in sales outside Western Europe.

Before being a nutrition specialist, DANONE was born glassmaker.1919: Company founded in Barcelona DANONE by merchant Isaac Carasso, whosells yogurt based lactic ferment, originally sold in pharmacies.1929: Appearance in France of the Parisian society of the DANONE yoghurt1966: The industrial group Boussois-Souchon-Neuvesel (BSN) is created by the meeting ofIce Boussois which manufactures flat glass and glass high-Souchon Neuvesel which manufactures bottles.1967: Merger of Gervais DANONE and to create Gervais DANONE1970: Sensing the decline of the glass, the CEO Antoine Riboud chosen to direct its activities towards the content container glass.1973: Acquisitions of Kronenbourg, Evian and above all the Gervais Danone sealBSN specialization in the food industry.1979: BSN-Gervais Danone disengages from its flat glass business. Ice Boussois leaving BSN-Gervais Danone.1980: A series of acquisitions in the European food market (Amora, Maille, The magpiesings, ... Carambar, the group General Biscuit, Nabisco's European subsidiaries:Belin, Jacob's, Saiwa).1990: BSN really internationalized its business1994: BSN became DANONE1996: Concentration of DANONE in 4 businesses who combines high growth potential andhealth positioning: dairy products, biscuits, drinks and nutritioninfantile. A strategy that will result in a fifty acquisitions through theworld.2007: Takeover of NUMICO, specializing in food and infant medicalized byOPA. Sale of its biscuit division to Kraft producer.

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2) The group's businesses

DANONE activities are divided into four areas:-Dairy-Free: with 20% of the market share (35% in some countries) and a presence in 45 countries, DANONE is the market leader. This activity, representing 56% of Group turnover In 2006 and grew by 9.2%, DANONE reaching 7.9 billion Euros.

-Packaged water: the division's turnover grew by 14.8% in 2006 when growth was only 8% on average since 2000. the margin operational World Beverages business grew only by 12.8% due to higher prices of raw materials packaging. All subsidiaries ofGroupe DANONE has contributed to this performance on all continents with particularAsia and Latin America. It remains the world number 2.

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-The infantile nutrition: Bledina is the leader in baby nutritionin France and second in the world. Its products are divided into two divisions namely milks infant foods and diversified. It has in its portfolio of brand NUMICO.

-Clinical Nutrition: This segment provides the medical treatment of malnutrition,to help those affected by certain diseases to preserve their condition, andsupport others with special nutritional needs. It is number 3 worldwide.

3) The group's strategy The Group has a policy of organic growth and acquisitions to establish a balancegeographically between developed and emerging countries. In this context, the Group is developing its business in countries which are growth drivers, namely Indonesia,Mexico, Brazil, Argentina, Russia and the USA for the Dairy Products activity. These countries accounted for 28% of total Group sales in 2007.

The Group's strategy is based on: -The focus on product categories with a strong health / wellness, - Its powerful brands and concentrated, boosted by ongoing communication,

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- Geography balanced between developed and emerging countries, - An ambitious innovation policy-based health benefits.

Organic growth in recent years based on the Group's ability to market quality products that meet consumer expectations in local markets:-Improving in-the products of acquired companies,- Introducing into products accessible to as many people in emerging countries in order to develop a mass consumption of branded food and sit down the Group's brands for the future,-Drawing-in marketing expertise of the Group to market value-added products already available in other countries, to support the increased purchasing power and changing consumption patterns.

Danone has decided to strengthen its teams in Asia which is a particularly dynamic area of development as important.

The group also proposed a strategy for increasing its partnership with Coca-Cola to United States. The soft drinks giant bought the French, for an undisclosed sum, the 49%of their joint venture responsible for the distribution of bottled water across the Atlantic. The Evian brand will continue to be distributed under license by Coca-Cola, rather than fight against powerful competitors in the U.S. market for water.

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B-RISK MEASUREMENT

1) BALANCE SCORE CARDS

Mission of the company: to bring health through food to the largest number of people.

Business strategy : The Group has a policy of organic growth and acquisitions to establish a balance geographically between developed and emerging countries

Financial targets

• geographical Acquisition of other company in the same sector

• forecasting sales growth of between 5 and 7 per cent

Clients targets

• Give a sense of pleasure in a healthy and natural product

• All people who take care of health with nutrition

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• static operating profit margin and achieve free cash flow of €2bn at the end of this year • People of emergent’s country

Business process targets

• Increase the production capacity• Diversify the brand in healthy products

Organizational / HR targets

• o attract and retain new talent, involve employees in projects, encourage communication at all levels and develop every employee’s professionalism

• translate Danone’s values into routine attitudes and promotes social responsability

CLIENTS TARGET: The demand from emerging countries growingThe particularity of this requests is in its growth rate of 16% by volume. Indeed, with trade liberalization, companies can access real opportunities taking into account certain specificities:- Low income per capita: with a smaller purchasing power , demand is difficult to access goods at very high value creation as nutraceuticals. Manufacturers must therefore adopt a different strategy than that used in developed countries.- Inter Region Segmentation: As for developed countries, emerging countries are subject to segmentation. It is through geographical criteria to take into account the customs, religions, purchasing power specific to the area.Thus, the development prospects are considerable, as in together 2.7 billion people, emerging markets have very good growth prospects.Through this analysis, the distinction of two major geographic areas obliges large groups to adopt a different product. A strategy produced very strong value creation for developed countries and a strategy of low value creation to emerging requirements all tailored to local taste.

BUSINESS PROCESS TARGETS :

-A product policy developed and produced consistently for the market to better meet customer expectations (portfolio diversification of activity in line with health trend among consumers and geographic diversification into new dyna Develop the health food portfolio (organic products and innovation)

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-Develop the group's business in emerging markets by acting on its flexibility (alternating direct investment / partnerships to reduce risk as the case Wahaha)

ORGANIZATIONAL AND HR TARGETS: We note that to remain an industry leader, the industrial sector must at all costs accumulate as many skills in areas that were not originally the heart of their business. This is why the development of pharmaceutical expertise comes increasingly into account in the strategic guidelines. If now the two leaders are content to focus on business-oriented nutrition, we can consider in the near future the acquisition of pharmaceutical companies to keep one step ahead of distributors

2) DANONE RISK SCORE CARD

Mission of the company : to bring health through food to the largest number of people.

Business strategy : Develloping the brand in the healthy sector

Business risk

• RISKS ASSOCIATED WITH THE COMPANY’S GROWTH STRATEGY

• RISKS ASSOCIATED WITH THE GEOGRAPHICAL DISTRIBUTION OF THE COMPANY’S BUSINESS ACTIVITIES

• RISKS ASSOCIATED WITH THE PRODUCTS

Market risk

• RISKS ASSOCIATED WITH THE CONCENTRATION OF PURCHASES OF SOME PRODUCTS AND SERVICES FROM A LIMITED NUMBER OF SUPPLIERS

• RISKS ASSOCIATED WITH A POSSIBLE DOMINANT POSITION OF THE COMPANY IN CERTAIN MARKETS

Credit risk

• INTEREST RATE RISK

• FINANCING RISK AND LIQUIDITY RISK

• CURRENCY EXCHANGE RISK

Operational risk

• RISKS ASSOCIATED WITH THE VOLATILITY OF PRICES AND A POSSIBLE SHORTAGE IN RAW MATERIALS

• RISK OF AN INTERNAL CONTROL

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FAILURE

• RISKS ASSOCIATED WITH THE CONSEQUENCES OF RESTRUCTURING PLANS

BUSINESS RISK

RISKS ASSOCIATED WITH THE COMPANY’S GROWTH STRATEGY:

-The Company's strategy is to become the leader in every market where it operates. In the context of further concentration in the food and drinks, this strategy involves the pursuit of external growth opportunities through acquisitions. These acquisitions could have a negative impact on the business of the Company if the Company fails to integrate acquired companies, providing the necessary resources and /or fails to achieve the synergies and cost savings it expects from these acquisitions.

-Relationships with partners of the Company in certain entities are governed by agreements, contracts or documents that could allow certain decisions to be taken with the agreement of the partners or without the consent of the Company. Such restrictions could make it difficult for the Company to carry out its strategy. Finally, some agreements with partners can provide the Company with stock options, particularly in the case of a change of control of the Company.

RISKS ASSOCIATED WITH THE GEOGRAPHICAL DISTRIBUTION OF THE COMPANY’S BUSINESS ACTIVITIES :

The operations of the Company and its employees may be exposed to risks and uncertainties related to the pursuit of commercial and industrial activities in many countries that may experience, or perhaps recently experienced economic instability, political or social, in particular Latin America, Asia, Africa and the Middle East. In addition, some countries in which the Company is now offering legal environments that are neither well developed nor very protective (especially in regard to intellectual property rights), maintain controls on the exchange or repatriation of income and capital invested, impose taxes and other payments and set up restrictions, sometimes with retroactive effect, on the activities of international groups.

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RISKS ASSOCIATED WITH THE PRODUCTS :

The goal is to have control over the risks both within the Company, but also from suppliers.

The risk of contamination is classified into four categories: microbiological, chemical, physical and allergic and depends on the nature of products. This risk of contamination exists at every stage of production cycle: at the time of purchase and delivery of raw materials, production processes, product packaging, storage and delivery of finished products to distributors and retailers food, storage and shelving of finished products at the points of final sale.

CREDIT RISK :

INTEREST RATE RISK

With interest rates on its debt, the Company is exposed to fluctuations in interest rates affecting the amount of interest expense.

The Company has implemented a policy to control and manage this risk, which aims to limit the volatility of its financial result.

FINANCING RISK AND LIQUIDITY RISK : As part of its operations, the Company does not rely on debt or periodical or in a meaningful way. Operating cash flow is generally sufficient to self-finance its business operations and internal growth. However, the Company may in the future to increase itsamount of debt to finance acquisitions. Its objective is to maintain its debt amount to a reasonable level in order, in particular, to preserve some flexibility with respect to its funding sources.

MARKET RISK

RISKS ASSOCIATED WITH THE CONCENTRATION OF PURCHASES OF SOME PRODUCTS AND SERVICES FROM A LIMITED NUMBER OF SUPPLIERS :

As part of its policy of optimizing its procurement procedures, the Company centralized the purchase of certain goods (particularly raw materials such as enzymes used in the dairy business online fresh produce) and services (especially outsourcing services or services) from a limited number of suppliers.

RISKS ASSOCIATED WITH A POSSIBLE DOMINANT POSITION OF THE COMPANY IN CERTAIN MARKETS : In some of its markets, the Company is the market leader. Accordingly, the

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Company may be accused of abusing a dominant position in these markets. Such allegations could affect the reputation of the Company, following a judicial proceeding and could have a material adverse effect on the business of the Company and the results.

OPERATIONNAL RISK :

RISKS ASSOCIATED WITH THE VOLATILITY OF PRICES AND A POSSIBLE SHORTAGE IN

RAW MATERIALS : The results of the Company may be adversely affected by the availability and price of raw materials, especially materials needed to produce food of the Company and beverages (mainly milk and fruit), and materials for packaging or transport its products (PET, PVC,light cardboard for boxes, and petroleum).

RISK OF AN INTERNAL CONTROL FAILURE

The Company has established an internal control system. This system, however it is appropriate, can provide only reasonable and not absolute assurance regarding the achievement because of inherent limitations in all control processes of the company. Therefore, the Company cannot exclude the risk of failure of internal control.

RISKS ASSOCIATED WITH THE CONSEQUENCES OF RESTRUCTURING PLANS :

The Company has already undertaken restructuring plans in the past and may continue to do so. Restructuring plans are composed of, in plant closure in particular, and downsizing in order to lower production costs, improve efficiency of its production processes, to implement synergies and to adapt to the demands of a changing marketplace. Restructuring could harm relations employee of the Company and cause labor disputes, including work stoppages, strikes and disturbances, which in turn could have a negative impact on the activities of corporate image of business and results.

3)  The investment policy and investment choices of DANONE Group

DANONE is a company operating in the agri-food sector.The bulk of investment in this sector is the construction of plants production, which can impact heavily on the funding side. Also if the same business decides to engage in this type of investment, it will not ensuring a sufficient return on investment to cover the expenses generated by this last.Yet when we see the strategy of Groupe DANONE, we find that the bulk of investment is based on acquisition approaches in which participation costing much less expensive than

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investing heavily in construction. This is more wisely because DANONE chooses to ally either absorbed or companies in the same sector and has already reached the production tool. This strategy is quite relevant because there are two scenarios:-The first is favorable when the company is progressing and where investment generates revenues.- The second is negative where the group can post their work assignment.After considering the report of management DANONE, we can see that in 2007 the group conducted a leveraged participation NUMICO at a rate of 98.85%. which significantly increased the volume of its investment.

4)  Debt policy The Group's objective is to control the cost of access to its capital, favoring a debt financing, while maintaining a reasonable level of debt for maintain its financial flexibility.Note that the company Danone has used debt to finance its investments, and leverage is present in this case, it has increased its return on equity and have significant tax savings.

The Group's policy is to diversify its funding sources.

Funding sources of the Group consist mainly of:-Bank debt: in 2007, to finance the acquisition of Numico, the Company entered two successive contracts of bank credit: - A bridge loan to the original principal amount of 11 billion euros concluded in July 2007 and arrived in maximum of maturity in January 2009. The principal amount of residual authorized $ 2.1 billion at December 31, 2007 ,it was used for this date1.7 billion euros. -A syndicated loan ("Revolving") concluded in December 2007 with a principal amount of EUR 4 billion in two tranches: the first a principal amount of 2.3 billion euros maturing in December 2010 (drawn for the entire December 31, 2007) and a second of a principal amount of 1.7 billion euros maturing in December 2012 (drawn up by 1.2 billion euros at December 31, 2007);-Treasury bounds: a French program of 2.5 billion euros (used 1.6 billion at December 31, 2007) and a Belgian program of $ 0.2 billion (fully utilized at 31 December 2007) ;

-Committed credit lines not used: a portfolio of bank lines of security concluded with credit institutions of the first rank, with maturities between 1 and 4 years, $ 3.1 billion in principal. atDecember 31, 2007, the Group has not made any draw on these lines. Moreover, the operating subsidiaries of the Company receive lines of credit available amount of 0.4 billion euros at December 31, 2007. In total, the Group has $ 4.4 billion committed credit unused at December 31, 2007, cash and marketable securities: they totaled $ 1,041million at December 31, 2007 (as against 3 219 000 000 euros at December 31, 2006).

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5) The market value of the action and its book valueBelow the share performance of DANONE compared to the evolution of the CAC 40January 2004 to January 2009 :

The market values of the action of DANONE during the years 2004, 2005, 2006 and2007 were :

Market value of the action

2004 :33,98

2005 :44,13

2006 :57,5

2007 :57,1

C-BANKER SUGGESTION AND RISK OFFICER ADVICES TO THE CEO

Think of an investment banker, who approaches Danone’s CEO. He uses to following return table:

Stock Return 1990-2010 1995-2010 1990-2010 2005-2010

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Danone 7.2% 8.1% 2.2% 2.5%

• The banker has the following story: over the last 5 and 10 years Danone stock has only performed a few percent. The return of 2.2% to 2.5% is similar to the yield on a German government bond. Therefore Danone’s risk profile is too low. In order to stay attractive to investors, Danone should increase it’s risk profile by:

– (1) investing more in local and cheaper production facilities in emerging markets to supply local as well as mature markets (Europe and US),

– (2) buy market share by means of acquisitions

– (3) leveraging the balance sheet

The first solution who consisting in investing more in local and cheaper production facilities in emerging markets to supply local as well as mature markets (Europe and US), is not interesting in the sense where the production place must be directly close to the market because are very sensible and have in majority a short life time. It’s for the most sophisticated product. If we need to supply US, the production must be in US, but today the production cost in developed country is not very profitable and this market arrives at his majority.

Now, conforming to the population and demand to the emergent countries, it’s more interesting to target this population and product for these emergent’s countries, and where the rivalry are not very important.

The solution who consisting to buy market share by means of acquisitions is the actual strategy of Danone Group; This strategy is more interesting in terms of finance that to create and invest in new building of production. Althoug Danone can have the financial possibility to do that, it’s better to enter in new market by acquisitions of existing companies specialized in the same sectors of Danone. And more, this solution permits to the Danone group to profit and use the local supplier and distribution circuit put in place by the acquired company. Danone can also use the expertise of the market of this company.

In terms of finance, this solution permits to reduce the riks by limiting the investment in company growth.

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Concerning leveraging the balance sheet, potentials inverstors can see that the actual balance sheet of Danone results of this politic of investments and acquisitions since 2007 (Numico etc…°); This analysis can explain why the Danone results since this last year are not famus, this results is dut to the recent investment who are not give yet good return on investment.

The best solution for me is to continue to buy market share by means of acquisitions, it’s the best solutions in the long term to obtain the best results and to stay attractive for the investors.

The share price are not excessive but we can see that it’s on the way to be stabilize and can be in the long term increase considerably with the results give by the acquisition strategy in emergent’s markets conduct by the Group Danone.

CONCLUSION

Like other industries, the dairy industry is experiencing real restructuring costs forcing it to mutate. Now this industry benefits from the skills of others to offer increasingly innovative products necessary to safeguard growth.

Emerging countries that were behind the quality of consumption could see their condition rapidly evolve. Eventually, they will not be only engine of growth in countries but countries that participate in sustainable growth.

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Danone's strategy to refocus on his heart to lead a business seems very promising future to glean the ranks and compete with Coca-Cola and other PepsiCo who can notforever keep their positions with sodas. The health market and Water are truly emerging issues of consumer products where Danone has a very good position by being the world leader in packaged water to Nestle and Coca Cola.

However, we wonder whether the strategy to spread his new job only 3 activities (Milk, Water, Food Enfantile) generate the same success as Nestle. Thus, the functional food fortified biscuits could reduce obesity, the new problem developed countries.

Moreover, when analyzing the debt policy of Groupe DANONE, we noticed that in 2007the company enjoyed a good financial autonomy that the debts represented 123% of the capital.

In conclusion, we can say that the DANONE Group follows a successful strategy and has an appropriate financial policy that allows it to this day maintain a strong competitive position in its market.

BIBLIOGRAPHY

Site internet

- Industire

http://www.industrie.gouv.fr/biblioth/docu/kiosque/cahiers/pdf/c124.pdf

http://www.eurasante.com/fileadmin/eurasante-medias/pdf/DossierPresse_Pole_NSL_2007.pdf

- Danone

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http://www.danone.com/cmscache/MYSESSION~E0182ACDC39743C5C1256D1000576720/RA02_PLF.pdf

http://www.boursier.com/vals/FR/danone-vaste-reorganisation-du-groupe-news-245305.htm

http://fr.wikipedia.org/wiki/Danone

- Agro news

http://www.agrojob.com/actualite/DANONE-convoite-l-eau-en-bouteille-en-Inde-1026.aspx

http://www.mfa.gov.ua/france/fr/publication/content/12182.htm

http://www.blogagroalimentaire.com/?2006/07/19/233-au-coeur-de-la-recherche-agroalimentaire-chez-danone-le-vitapole

http://www.diplomatie.gouv.fr/fr/actions-france_830/economie-mondiale_901/

- Pharmacie

http://www.lesechos.fr/info/sante/200073527.htm

http://www.pharmaceutiques.com/archive/une/art_795.html

- R&D

http://cisad.adc.education.fr/reperes/telechar/formul/ent/moyens/moyens06/noticeqg06.pdf

http://agreste.agriculture.gouv.fr/IMG/pdf/primeur192.pdf

DANONE 2010 AND 2008 REGISTRATION DOCUMENT

BRAND POSTIONING STATEMENT (Alexandre daval tools)

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