July 3, 2007/London/MarketWatch -- French food giant Groupe Danone on Tuesday said it has agreed to sell its biscuit business to U.S. rival Kraft Foods for 5.3 billion euros ($7.2 billion) in cash.

As required by French law, Danone must consult with its Works Council prior to entering a definitive agreement, but both companies expect the transaction to close by the end of the year.

Kraft said the purchase will expand its presence in the snacks business, its fastest growing global segment, and give it a strong foothold in Europe.

Danone's biscuit and snack division is home to the Lu, Prince and Tuc brands.

Shares of Danone rose 3.5% in Paris morning trading after being suspended earlier in the day. They closed up 1.6% on Monday following media reports that a sale of the unit was imminent. The price mentioned, however, ranged from 3.4 billion euros to 4.5 billion euros, significantly below the agreed price.

"It looks like a pretty good price to us," Iber Securities told clients in a note Tuesday.

The biscuit unit is Danone's least buoyant and smallest. It represented about 16% of group sales last year and saw organic growth of only 3.1% compared to 6% to 8% at other units. It has also recently become less central to the group's strategy, which is now more focused on emerging markets.

Georges Casala, the head of the unit being sold, will join Kraft with several members of his team and manage its entire European biscuit business, Kraft said.

Among several guarantees Danone seems to have obtained from the acquirer, the headquarters of the business will remain in the Paris metropolitan area for the foreseeable future. Kraft also specified that it does not intend to close down any of the Danone manufacturing facilities in France for at least three years following the agreement.

Cash for a dairy acquisition?
Analysts immediately started speculating on what Danone would do with the cash, which they said the company doesn't need.

Natexis Securities analysts said it would "clearly make good sense" for the French group to acquire Dutch company Numico , which specializes in baby food and clinical nutrition. It noted that such a deal, although management has ruled it out before, would boost earning, even at a high price, and enhance the group's profile and operating margin.

Societe Generale analysts said Monday that any decision to sell the biscuit business would be "opportunistic" and that the market would expect the cash raised to be put to "good use," on an acquisition in the dairy segment for instance.

From the July 16, 2007, Prepared Foods e-Flash