French food group Danone settled a legal row with China's top beverage producer Wahaha by selling out of their joint venture, as analysts speculated Danone is looking to the United States for a big acquisition.
Danone agreed to sell its 51 percent stake in the venture to Wahaha, the companies said on Wednesday. A source briefed on the matter said Danone was selling the stake for around 300 million euros ($437 million).
Some analysts speculated that Danone could use the cash to help finance an acquisition, despite Danone's denial on Tuesday that it was holding bid talks with U.S. babyfood company Mead Johnson Nutrition Co.
The end to the dispute is good news but ... the market will no doubt think that if Danone is selling out of Wahaha it's to finance a big deal, Oddo Securities said in a research note.
Bankers said Mead Johnson could be a good deal for Danone, as did analysts at Credit Suisse and Goldman Sachs, although they cautioned that any deal could be hard to pull off.
Goldman Sachs analysts said a takeover of Mead Johnson by Danone, to overtake Nestle SA as the world's biggest baby-nutrition company, had a compelling strategic logic.
However they said a deal could be complicated by tax implications for Bristol-Myers Squibb Co, which spun off Mead Johnson earlier this year and still owns 83 percent.
Credit Suisse said Mead Johnson's Latin American and Asian businesses would be a great fit for Danone.
Mead Johnson has a market capitalization of roughly $9 billion, while Danone has a market capitalization of around 26 billion euros.
CM-CIC Securities said in a note: We think that Mead Johnson is an attractive target for the group. If a deal between Danone and Mead Johnson is ruled out for now, who can say what will happen tomorrow?
Danone shares were up 1.4 percent at 41.105 euros by 1216 GMT, off an earlier high of 41.70 euros.
Speculation that Danone was building a war chest for possible deals was fueled in June when Danone raised 3.05 billion euros through its first capital increase in 22 years.
Danone has recently focused more on the medical nutrition business as sales of its Actimel yoghurts and Evian water have come under pressure, and in 2007 the company bought Dutch baby food group Numico for around 12 billion euros.
FRENCH COMPANIES HIT CHINESE WALLS
Several blue-chip French companies have endured tough times in China, where matters have often been complicated by French criticism over China's record on human rights and backing in Paris for pro-Tibetan independence movements.
Danone's throwing in the towel, said GSD Gestion fund manager Christophe Gautier, whose firm owns Danone shares.
The Chinese dispute first emerged in 2007, when Danone publicly accused Wahaha of illegally setting up parallel businesses outside their own venture, and escalated into a high-profile legal brawl.
In November that year French President Nicolas Sarkozy intervened on behalf of Danone in the dispute during a meeting with Chinese President Hu Jintao.
In 2007, Danone also pulled out of a new dairy venture with China's biggest milk processor Mengniu and sold its 20 percent stake in Bright Dairy, saying it planned to operate on its own in China as much as possible.
Danone has a longstanding commitment to China where it has been present since 1987 and we are keen to accelerate the success of our Chinese activities, Chairman and Chief Executive Franck Riboud said on Wednesday.
(Additional reporting by Sudip Kar-Gupta, Jacqueline Wong and Quentin Webb; Editing by Greg Mahlich and Erica Billingham)
($1=.6863 euros) ($1=6.832 yuan)