Lifeway Foods, Inc. has turned down Danone North America’s revised proposal of around $307m ($27.00 per share in cash) stating it ‘substantially undervalues Lifeway and is not in the best interests of the company’.
The kefir producer – whose leadership has been embroiled in a feud over the company’s strategic direction – claims the business has superior financial metrics compared to other high-growth food and beverage companies and is poised for further growth.
The firm estimates that over the last five years, it achieved 788% total shareholder return; 71% revenue growth (from $94m to $160m); and expanded its operating income by $17m. Lifeway forecasts annual Adjusted EBITDA to grow from $22m in 2023 to between $45m – $50m in 2027.
According to a statement released on November 26, 2024, the Lifeway board feels Danone’s revised proposal – which built on an initial offer of circa $283m – implies ‘a very low multiple of around seven to eight and a half times this expected EBITDA range ‘even prior to accounting for substantial synergies and additional operational efficiencies that Danone (or another strategic acquirer) could realize’.
“Lifeway Foods is the number one kefir brand and is experiencing double-digit growth, which is eclipsing much of the rest of the dairy and food industry,” the company said in a statement.
“As Lifeway’s strong historical financial results indicate, the company has sustained momentum with runway for significant long-term growth and margin expansion.
“This growth is being driven by an increasing recognition among consumers of the importance of the gut microbiome to overall health and the benefits of the naturally available high-quality protein and probiotics contained in kefir.
“A growing body of scientific research supports these benefits and speaks to the unique value proposition of Lifeway.”
Not for sale?
Despite turning down Danone a second time, Lifeway’s board remains open-minded: “The Board determined that Danone’s $27.00 per share proposal substantially undervalues the Company. The Board is not, however, opposed to the sale of the Company at any price,” according to the statement.
“The Board has carefully evaluated the Company’s standalone plan and believes it has strong potential to provide superior value to all shareholders as compared to Danone’s revised proposal.”
Evercore is serving as a financial advisor to Lifeway, and Sidley Austin LLP is serving as legal counsel to Lifeway.
Danone’s alleged advantage over other bidders
Danone and Lifeway remain deadlocked over whether the existing shareholder agreement between the dairy major and the kefir producer should be invalidated over Danone’s acquisition offer.
In a letter dated November 8, 2024 and filed with the SEC, Lifeway counsel Sidley told Danone that the kefir firm would forgo litigation if Danone ‘agrees to waive all its rights under, and not seek to enforce any of its rights under, the shareholder agreement’.
Responding on November 15, Danone refused to comply and vowed ‘to vigorously defend against the claims set forth’. Litigator James W. Ducayet, Esq., partner at Wachtell, Lipton, Rosen & Katz (WLRK), argued the shareholder agreement was valid under Illinois law and was also not anit-competitive.
“The agreement was entered into to facilitate collaboration between a still relatively nascent Lifeway and Danone—including Danone’s infusion of significant capital and, for a period of time, participation on the board, where it could provide some of its superior knowledge and insight.
“The specific features you attack—Danone’s right of first refusal, provisions relating to share issuances, and consent right over claims related to health—are reasonable on their face” because it “help[s] protect against legitimate concerns regarding dilution of Danone’s equity stake.”
The Danone counsel goes on to say rights of first refusal and rights with respect to share issuance ‘not only help protect against legitimate concerns regarding dilution of Danone’s equity stake, but also add additional safeguards preventing Lifeway from freely passing along Danone’s sensitive business information to a competitor’.
“Moreover, the right of first refusal reduces the risk that a sale to another competitor would itself be seen as anti-competitive, by preventing a situation where Lifeway could be viewed as a mere facilitating device for collaboration between two larger competitors.”
In a letter dated November 25, 2024, Lifeway’s counsel continues to argue the shareholder agreement is invalid and asserts it provides Danone, in its capacity as a potential buyer, a ‘significant advantage over any other potential bidder’.
“That plainly impinges on the rights of the minority shareholders other than Danone to receive a fair price, even if Danone is also itself a minority shareholder,” Sidley’s James W. Ducayet argued in the letter. “The shareholder agreement also significantly limits the company’s freedom of action in numerous other ways, as discussed in our prior letter, also harming other shareholders.”
The counsel also argued Danone’s right of first refusal ‘persists even if Danone has no equity stake to dilute—demonstrating that the provision is a nakedly anticompetitive tool enabling Danone to thwart transactions with competitors, not a narrowly tailored protection for a minority shareholder.”
Lifeway continues to reserve all rights, and waives none, the letter concludes.