Taking Stock Water, Water Everywhere

Guy Rolnik
Guy Rolnik
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Guy Rolnik
Guy Rolnik

The whole deal is worthy of being a case study in business administration school. It might be especially apt for INSEAD, the school at Fontainebleau, France, where the main character grumpily sits: the French foodstuffs company Groupe Danone.

Regrettably, nobody's going to write up the case study because none of the parties involved has any interest in publicity. We will have to settle for a brief description of how it looks from the outside.

The story involves two main developments. The first was in April 2003, when Danone and Mayanot Eden (Mey Eden) of Israel announced they were merging their bottled mineral water operations in Europe.

The announcement was a caw of triumph for Mey Eden. The Danone deal legitimized a protracted process, seven years in which the company invested half a billion shekels in acquiring European companies that marketed bottled water to offices and homes. It borrowed most of the money from Bank Hapoalim.

That European blitz was both costly, and scary. Money flowed like water, losses surged and the Israeli capital market began to entertain doubts as to the stability of Roni Naftali's empire.

But the Danone deal poured cold water on the skeptics. It valued Mey Eden's European water operations at 200 million euros, significantly more than the Israeli firm had invested. Also, Danone received an option to buy the whole kit and caboodle for an even higher price.

Crush Nestle!

The second milestone was last Friday, February 2005. When publishing its 2004 financial statement, Danone admitted it was writing off 600 million euros on its mineral water business. Of that, 150 million euros was from its partnership with Mey Eden in Europe.

Managements only record tremendous write-offs of deals they concocted themselves when they are out of choices. Huge one-time charges are proof that a deal was a really bad one. A flop. Evidently Danone had no choice. It must have seriously overpaid for the bottled mineral water marketing companies it bought, including Mey Eden Europe.

Probably it expected fast growth but it failed to materialize, profits trickled in later than expected, and the books had to toe the line of reality.

Why did Danone pay so much? Mainly because its bitter rival, Nestle of Switzerland, had predated it with a series of overpriced acquisitions of its own. Danone does not like to lose, especially not to Nestle. And bottled mineral water was perceived, two years ago, to be the battleground they could not afford to lose.

Roni Naftali, the founder of Mey Eden and the engineer of its European adventure, claimed throughout that he had built the European empire to survive on its own merit, not to sell. But he knew perfectly well that it stood little chance of holding its own against the giants, and how profitable that rivalry with Nestle could prove to be for him.

Although Mey Eden's financial status in 2003 was not the stuff of envy, in the spring of 2003 Naftali managed to sew up an astonishing deal with Danone. He received top dollar, he obtained an option to up the price even more if the venture met certain ambitious milestones, he retained control, and he even kept the brandname Eden Springs, which Danone has plugged to households and offices ever since.

True, there was one little financial detail. Naftali did not lose his head as the waves of money rolled in. He took a large chunk home, in cash. He sold Danone a small amount of his shares in Mey Eden for the astonishing sum of 83 million euros, at a company value of 410 million euros, almost three times its valuation today.

In July 2003, immediately after the deal was done, TheMarker Magazine crowned Naftali the Marketer of the Year. Today his achievement looks all the more remarkable.

Sometimes in business, your real market is not consumers, it's managements of big business. You have to pick the moment to show them the product, and convince them it's the answer to their dreams. If you can convince them you don't need them, not only will you sell your goods: you'll get top dollar, too.



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