French food group Danone said Tuesday it is in exclusive talks to sell its biscuit and cereal unit for 5.3 billion euros ($7.2 billion) in cash to Kraft Foods, the world's biggest cookie maker.
The proposed transaction comes at a time when Kraft is under pressure from activist investor Nelson Peltz to improve its performance and broaden its international operations.
Kraft's bid for Danone's cookie unit, which includes the LU, Prince and Tuc brands, would help accomplish this goal by giving it a stronger foothold in Europe and in emerging markets.
CNBC's David Faber said people familiar with Peltz's thinking said he is happy with the deal.
"The thought is you are getting deeper into a business you know well, you're increasing your exposure to international markets," Faber said.
Meanwhile, the sale of the biscuit business by Danone should allow it to focus on its faster-growing dairy and drinks business, pay off some 2.9 million euros of debt and raise cash for future possible acquisitions.
The offer is more than double the 2.2 billion euros in sales the unit made last year. 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% 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 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% after they resumed trading after an earlier suspension. The stock added 1.9% to 62.13 euros, taking gains to 8.5% this year and bringing its performance almost in line with the DJ health 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% 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.
"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 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 division 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.
The biscuit unit is Danone's least buoyant and represented about 16% of group sales last year. The LU brand accounts for nearly half of the biscuit and cereal division's sales. The unit's like-for-like sales rose 3.1% last year while dairy and beverage rose 9.2 and 14.8%.