French food group Danone is in exclusive talks to sell its biscuit and cereal snack unit for 5.3 billion euros ($7.2 billion) in cash to Kraft Foods Inc., the world's biggest cookie maker, they said on Tuesday.

Kraft's offer for Danone's biscuit division, which includes the LU, Prince and Tuc brands, will give the U.S. food giant a stronger foothold in Europe and in emerging markets and access to an extra 36 factories worldwide.

It will allow Danone to focus on the health range in its fast-growing dairy and drinks business, pay off some 2.9 billion euros of debt and raise cash for future possible acquisitions.

The bid is more than double the 2.2 billion euros in sales the unit made in 2006 and comes after Danone has worked to shape up its least buoyant division in recent years. Danone's stakes in its Indian and Latin American businesses are not part of the deal.

Danone and Kraft, maker of Oreo and Chips Ahoy! cookies, Philadelphia cheese and Milka and Cote d'Or chocolate, expected a final deal could be reached in the last quarter of 2007.

Danone Chairman and Chief Executive Franck Riboud said at a news conference with his Kraft counterpart Irene Rosenfeld he would address any concerns the French government or trade unions might have about the deal, which he described as amicable and transparent.

Kraft said the European biscuit headquarters would stay in the Paris region for the foreseeable future and it does not plan to close any of Danone's biscuit manufacturing facilities in France for at least three years after the final deal is signed.

France represents 40 percent of Danone biscuit sales.

French economic patriotism has surfaced when major French companies became subject to speculation they could be bought by non-French rivals. Rumors in 2005 that U.S. soft drinks firm Pepsi (PEP.N: Quote, Profile, Research) might bid for Danone led the government to say it would aim to shield French companies from hostile overseas bids.


Danone shares rose as much as 4.2 percent after they resumed trading after an earlier suspension on Tuesday. The stock added 2.5 percent to 62.51 euros by 1329 GMT, taking gains to 8.5 percent this year and bringing its performance roughly in line with the DJ Stoxx European food and beverage index.

The multiple at which they sold to Kraft is good and for Danone it's good to get cash for acquisitions, such as Numico, a senior analyst at Cheuvreux said, rating the stock a buy.

Some analysts have said the baby food business of Dutch food group Numico could fit with Danone's dairy business and its Bledina baby food, which sells in France and Belgium.

Other takeover targets analysts have mentioned include Russian consumer foods group Wimm-Bill-Dann, in which Danone owns an 18.4 percent stake, as well as the remaining stake in its Chinese Wahaha beverages joint venture.

Riboud left open what Danone plans to do with the cash it fetches, if the deal goes ahead, on top of its already healthy balance sheet. Danone is the number one maker of fresh dairy and bottled water by volume.

I will not comment on what we plan to do, he said, adding the company could invest in new products or in new countries. We are going to speed up all these approaches. We have targets, not the ones you are thinking about, they are mid-sized. I will not give you any information before it's done.

Apart from accelerating the growth and development of its beverage and dairy products, including its Essensis yoghurt which it claims benefits the skin, other possibilities include more share buybacks or the payout of an exceptional dividend.

Kraft's Rosenfeld expected the takeover of Danone's biscuit and cereal snacks to add to its earnings from the first year.

It will double the U.S. food giant's size in China, give it a foothold in Malaysia and Indonesia and in eastern Europe, mainly Russia. Biscuits represented $5 billion and the European Union $6.7 billion out of group sales of $34.4 billion last year.

Rosenfeld said Kraft could afford Danone biscuits without selling assets. We have a very strong balance sheet, she said, adding the deal would be paid for in debt. Still, Kraft would keep reviewing its portfolio and could in time decide to sell businesses that fail to meet its longer-term growth targets.

Danone's biscuit unit represented about 16 percent of group sales last year. The LU brand accounts for nearly half of the biscuit and cereal snack division's sales. Its like-for-like sales grew 3.1 percent last year while dairy and beverage rose 9.2 and 14.8 percent.

Lazard bank is advising Danone and Goldman Sachs is advising Kraft on the planned transaction.