- Lifeway Foods, Inc. (Nasdaq: LWAY) facing takeover advance from France’s Danone S.A. (Paris: BN.PA), which owns 23% of leading U.S. kefir maker as strategic partner
- Danone has attempted to buy Lifeway for $25 a share and $27 a share, stock now at $31 after strong quarterly report
- Lifeway run by CEO Julie Smolyansky, daughter of late founder, under pressure from mother and brother to leave
- Julie’s mother Ludmila Smolyansky and brother Edward Smolyansky, former directors at Lifeway, supported $25-a-share offer and have 26% combined stake
- Mr. Smolyansky running so-called consent solicitation to replace Julie and current board which so far has not succeeded
- Danone says if current round of takeover talks fail, it “intends to consent with respect to all of the shares of Common Stock it owns in favor of Edward Smolyansky’s proposals…to replace the entire Lifeway Board of Directors.”
- Professor Charles Elson told CorpGov Danone’s approach is “a bit coercive” and it “won’t be an easy road” to effect takeover
- Corporate governance experts point out that any board, even one put in place by the agitating Smolyansky shareholders, still has fiduciary duty to shareholders
- Any takeover requires 2/3 supermajority shareholder approval in Illinois, where Lifeway is incorporated, compared with simple majority in Delaware
What began as a helpful French connection has crept into an unwelcome embrace.
Morton Grove, Ill.-based Lifeway Foods, Inc. (Nasdaq: LWAY) scratched and clawed its way from humble beginnings 40 years ago to become the leading U.S. producer of U.S. kefir, a probiotic dairy beverage that’s become a favorite for the health-conscious set with an overwhelming market share. Along the way, the company teamed up with Danone S.A. (Paris: BN.PA) in the late 90s, giving the French consumer giant an equity stake, now at about 23%, in exchange for a strategic partnership that should have been mutually beneficial.
But over time, Danone arguably became more predator than partner. For the last several years, CEO Julie Smolyansky reportedly has grown frustrated as Danone apparently failed to use its global footprint to help Lifeway with goals like international expansion and cheaper sourcing of key ingredients.
The milk came to a boil last year, when the French company surprised Ms. Smolyansky by making a public announcement of a $25-a-share takeover offer with virtually no notice. The board rejected that offer, prompting Danone to bump it to $27 a share, which also was rebuffed.
But not all shareholders objected to the deal. Ms. Smolyansky’s mother, Ludmila Smolyansky and brother, Edward Smolyansky, who have a 26% combined stake were supportive of a sale – even at $25 a share. Both the mother and brother were previously on the board of directors and for years have made known their desire to remove Ms. Smolyansky as CEO.
Frustrated with the lack of a deal, Mr. Smolyansky has spearheaded a co-called consent solicitation, asking shareholders to vote to remove his sister as CEO and replace the entire board. That effort has so far not succeeded and Mr. Smolyansky has had to extend it.
Fast forward several months and the stock has trended higher in the absence of a deal – especially in recent weeks. Earlier in August, the company reported a 10% rise in second-quarter sales, reaching a new record as margins increased.
“We are just getting started,” Ms. Smolyansky said at the time. “With record sales, expanding margins, category-leading innovation, and a production platform ready to scale, Lifeway is positioned for sustained, profitable growth.” The stock has risen about 12% since the report, now at $31 – far above Danone’s takeover bid prices from last year. In the absence of other significant news, the stock’s latest run is arguably due to the company’s operating performance.
Meanwhile, Danone and Lifeway have entered a fresh period of negotiations over a possible sale. That discussion is scheduled to last until September 15, though it can be extended if both parties agree to continue in good faith.
But Danone, advised by Wachtell, Lipton, Rosen & Katz, which typically works on the defense rather than the offense, has issued an ultimatum – raising questions about whether proper corporate governance will prevail or minority shareholders face risk. In an SEC filing, Danone said that if Lifeway won’t sell willingly, it will vote in favor of Mr. Smolyansky’s consent to “replace the entire Lifeway Board of Directors.”
Spokespeople for Danone and Lifeway both declined to comment while a public-relations firm representing Edward and Ludmila Smolyanksy didn’t reply to requests for comment from CorpGov.
If acted upon, Danone’s threat would seem to clear the way to finally get what it wants: a board that will swiftly approve a clean takeover of the company. However, corporate governance and activism experts say there are a host of legal and practical hurdles that remain in the way.
“Danone sounds a bit coercive,” Charles Elson, Founding Director, Weinberg Center for Corporate Governance at the University of Delaware told CorpGov. “It would not be an easy road for Danone.”
Assuming Danone did support the consent solicitation, it would appear be close to tipping the scales in Mr. Smolyansky’s favor. With Danone’s 23% stake and a combined 26% stake between Mr. Smolyansky and his mother, they’d be just shy of 50% support.
But that’s just the beginning of the process. Presumably, Mr. Smolyansky’s slate of directors is very supportive of a deal. Yet they still have obligations that cannot be shirked – no matter what their biases may be.
“As a general rule, boards are supposed to seek to maximize value for all shareholders,” said Kenneth Mantel, Partner, Olshan Frome Wolosky LLP who isn’t involved in the situation. “A brand-new set of directors elected in a proxy contest has the same legal obligations from the moment they are elected.”
And Danone may want to be careful about its actions – even behind closed doors. That’s because there is a serious likelihood that many details of the negotiation will be public for all to see. In such a going-private style transaction, the SEC may require extensive disclosure under rule 13e-3, according to Francisco J. Morales Barrón, Partner, Mergers & Acquisitions and Private Equity, Vinson & Elkins LLP, an attorney who also is not involved in the situation.
Professor Elson added that the key question will be “did you exercise your fiduciary duty to get the highest price?” He said that if the board failed to do so, it could even face a fiduciary duty lawsuit.
And at the end of the day, extensive shareholder support will be needed to get a deal done. Under law in Illinois, a takeover of this kind requires a 2/3 supermajority shareholder vote. That’s a quirk of Illinois: The law in Delaware, the most popular state where companies incorporate, only requires a simple majority.
At the end of the day, Danone will likely need to come up with a number that impresses minority shareholders if it wants to own Lifeway. That raises the question of what the company is truly worth.
There is only one analyst who covers Lifeway full time, and he’s bullish on its fundamentals. We “believe Danone’s unsolicited $27/sh offer is increasingly divergent from the fair value of this high-growth, on-trend, category-defining brand,” Ben Klieve, Senior Research Analyst at Lake Street Capital Markest said in a note to clients Aug. 12, the day after Lifeway reported earnings. He also raised his price target to $33 a share, up from $30 a share.
Mr. Klieve underscored the company’s “on-trend nature, its exceptional financial performance, and overwhelming market share within the kefir category” to justify his target. He added that his target is well below the 20x EV/EBITDA peers command, with his target reflecting a multiple of just 14x.
While the agitating Smolyansky family – and assuredly Danone – were thrilled by a $25-a-share takeout, the company has proven it is worth more. And while Danone can flex its muscles, it’s bound to stumble if it tries to bully minority shareholders.
CorpGov
John Jannarone
Editor-in-Chief
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