July 9 (Bloomberg) -- Groupe Danone SA offered to buy Royal Numico NV for 12.3 billion euros ($16.8 billion) in cash to gain the biggest share of Europe's baby-food market.

Danone, based in Paris, plans to pay 55 euros for each Numico share. The price is 38 percent more than last week's close. Schiphol, Netherlands-based Numico backed the bid, and the companies expect a ``definitive agreement'' within weeks.

The French company will gain Numico's Cow & Gate and Nutricia brands and increase revenue 22 percent. Numico has 40 percent of the European market for baby foods, which are more profitable than Danone's yogurts and Evian water. Chief Executive Officer Franck Riboud agreed to sell Danone's cookie unit to Kraft Foods Inc. last week for 5.3 billion euros.

``It's strategically a very good move,'' said Michele Giovannetti, a fund manager at Paris-based Montpensier Finance who helps manage 1 billion euros in assets, including Danone shares. ``The price seems quite high on first sight.''

Numico shares surged 4.55 euros, or 11 percent, to 44.50 euros in Amsterdam, a six-year high, before being suspended at midday. Danone shares fell 2.02 euros, or 3.3 percent, to 59.48 euros in Paris, the steepest drop since February.

Nestle SA, the maker of Neslac and Good Start infant formulas, agreed in April to acquire Novartis AG's Gerber brand for $5.5 billion. The world's biggest food company gained 82 percent of the U.S. baby-food market.

Gerber Comparison

The purchase price is about 4.7 times Numico's sales. That compares with 3.4 times for Nestle's purchase of Gerber. Danone Chief Financial Officer Antoine Giscard d'Estaing said on a conference call that the price paid was ``slightly higher'' than similar transactions. Danone said synergies from the transaction would save 60 million euros.

``Numico has all the characteristics we like: health orientation, extremely good research and development, market leadership and exposure to high-growth markets,'' Giscard said.

He added that the transaction will boost earnings per share by 3 to 4 percent in 2008 and that Numico's expertise will help market products to improve health, following on Danone's Actimel immunity-enhancing milk drink. Giscard said Numico's research could help Danone develop drinks boosting mental health for senior citizens, targeting aging baby boomers.

Numico's net income last year rose 2 percent to 202 million euros, while Danone had a profit of 1.35 billion euros, down 7.5 percent from 2005. Shares of Numico have doubled in the past three years after the company sold unprofitable vitamin units to focus on nutritional foods.

Bennink Leaves

``This is a brilliant offer,'' said Jan Meijer, an analyst at Amsterdam-based Theodoor Gilissen Bankiers NV. ``It's a cash offer and I can't imagine that this deal will fall apart.'' He has a ``hold'' rating on the stock.

Jan Bennink, Numico's CEO and a former Danone executive, will step down after the transaction is complete, the companies said on a conference call. Jean Marc Huet, Numico's chief financial officer, will also leave.

The Dutch company will keep its headquarters at Schiphol, near Amsterdam, the statement said. Speculation about an acquisition pushed the stock up 15 percent this month. Numico will become Danone's third business group after dairy and drinks, replacing cookies, the company said.

Profit Margins

Riboud said when the Kraft deal was announced that Danone is focusing on businesses with a ``strong health orientation.'' Besides baby food, Numico makes food for hospital patients and the elderly.

The operating margin at clinical nutrition, which accounts for more than a quarter of sales, was about 26 percent in 2006, leading the overall margin of almost 19 percent.

Numico will also help Danone expand in emerging markets. The company bought Dumex, which sells baby food in China and Vietnam, for 1.2 billion euros last year to tap growth in economies growing more quickly than western Europe.

``This is a huge acquisition, but we can integrate it right away,'' Danone's Giscard said on the call. ``It allows us to become immediately active in a lot of countries.''

Danone's Fresh Dairy Products, including Actimel and its existing baby-food brands, had a margin of 14 percent last year, while the margin at its beverages unit amounted to 13 percent.

The French company makes Bledina and Mon Premier Danone baby food. After the cookie unit is sold, infant nutrition will account for about 15 percent of sales, according to ING analyst Marco Gulpers, an analyst at ING Financial Markets in Amsterdam.

Pepsi Speculation

Before the deal was announced, analysts had said Danone, itself the subject of recurring speculation of a takeover by PepsiCo Inc., may use a Numico bid to repel the Purchase, New York-based drinks maker. Traders and analysts had also speculated Pepsi could have been the bidder for Numico as the shares surged.

``Danone could easily finance a transaction'' and make a ``preemptive move'' against Pepsi, Gulpers had said.

PepsiCo won't comment on the speculation, said spokesman Mark Dollins. PepsiCo doesn't make any baby food, he said.

Credit-default swap contracts based on 10 million euros of Danone debt rose 3,000 euros to 16,500 euros, according to Deutsche Bank. Credit-default swaps are used to speculate on a company's ability to repay debts. A rise indicates worsening perceptions of credit quality.

To contact the reporter on this story: Joram Kanner in Amsterdam at jkanner@bloomberg.net

Last Updated: July 9, 2007 14:43 EDT