French prosecutors probe Nestlé, Danone over tainted baby formula

A crisis over contaminated baby formula has grown with product recall after recall in recent weeks. On Friday, Paris’ public prosecutor said it opened investigations into five companies that make the formula. Parents and investors are on edge.

The investigation concerns possibly contaminated infant nutrition products distributed by three of the world’s largest dairy groups, Nestle, Danone, and privately-held Lactalis, as well as smaller brands Babybio and La Marque en Moins.

The recalls were due to possible contamination of cereulide, a heat-stable toxin that can cause nausea, vomiting and diarrhoea when consumed. While symptoms typically resolve within a day, it can lead to more severe complications.

The Paris prosecutor said it opened its investigations due to “deception regarding goods posing a danger to human health,” an offence punishable by up to seven years in prison and a fine of up to 3.75 million euros ($4.45 million), according to a translated statement. CNBC reached out to the companies mentioned for comment.

In January, Nestle CEO Philipp Navratil said he was sorry about the worry and disruption this has caused parents and customers. “Let me reassure you that your safety and wellbeing is our highest priority,” he said.

The prosecutor’s office took up the case due to the large number of complaints across the country, it said.

In addition, the French health ministry is looking into three reported baby deaths in cases where consumption of infant formula affected by the recall was reported. On Feb. 11, it said that no causal link had been established and that judicial investigations are underway.

Worldwide recalls

Nestle published a “sequence of events” on Jan. 29, saying it found traces of cereulide in batches of some of its finished products in early December in its factory in the Netherlands. 

On Dec. 10, it informed Dutch authorities, the European Commission and potentially impacted countries of potential risks, according to the company’s timeline, which added it initiated recalls the same day of all batches produced: 25 products in 16 countries in Europe.

In January, the Swiss company issued its first major public recall for brands SMA, Beba and Little Steps across Europe, and recalls by French peers Danone, the maker of best-selling Aptamil and Cow & Gate, and Lactalis followed. 

So far, there have been recalls in over 60 countries.

The contamination source has been traced back to an ingredient supplier of arachidonic acid (ARA) oil, which is often added to baby formula, Nestle said.

The fallout has grown over time because many different companies and multiple brands used this supplier. The supplier hasn’t been officially named. The UK’s Food Standards Agency said the supplier of the ARA oil was no longer being used by Nestle or Danone

It still urged parents and caregivers to check if the formula products they have at home were among those batches listed in the recalls.

On Feb. 2, the European Food Safety Authority set a threshold level of the toxin cereulide. There hadn’t previously been a harmonized standard because of its rarity, said Barclays analyst Warren Ackerman.

Earlier this month, UK authorities said they had received at least 36 clinical reports of infants showing symptoms consistent with cereulide poisoning.

Nestle and Danone report earnings this week

Nestle’s infant formula makes up about 5% of revenue, and the company has disclosed that recalled products represent only about 0.5% of revenue. “The larger 5% number is probably more relevant given the likely consumer confusion and brand equity risk,” said Bernstein analyst Callum Elliott in January. 

“For Danone, infant formula is more important, comprising around 21% of group revenues by our estimates, and more than this in terms of profitability.”

Nestle and Danone are both slated to report earnings later this week, where investors hope to get a better picture of the financial impact of the recalls.

As investors worry about the financial fallout and potential reputational damage, Nestle shares are up 1.7% year-to-date, while Danone stock has shed 5.5%. The pan-European Stoxx 600 index is up 4.6% over the same period.

Nestle and Danone stocks slumped at the end of January, at the height of the recall announcements, but have since recovered some of their losses.

– CNBC