French prosecutors in Paris announced on Friday the launch of an investigation into five infant formula manufacturers. This follows a global product recall after the detection of cereulide, a heat-stable toxin, in baby food, causing significant concern among parents and investors.

The crisis surrounding contaminated infant formula has intensified in recent weeks, leading to successive rounds of product recalls. The companies under investigation include three major global dairy groups: Nestlé S.A., Danone, and the privately-held Lactalis, along with smaller brands Babybio and La Marque en Moins.

The recall was initiated due to potential contamination with cereulide. Consumption of this toxin can cause nausea, vomiting, and diarrhea. While symptoms typically subside within a day, they can sometimes lead to more severe complications.

The Paris prosecutor's office stated the investigation is for "selling hazardous and substandard goods," an offense that carries a maximum penalty of seven years imprisonment and a fine of up to 3.75 million euros (approximately $4.45 million). The companies involved have been contacted for comment.

In January, Nestlé S.A.'s CEO, Philippe Naffrath, apologized for the worry and inconvenience caused to parents and consumers. He assured the public that safety and health are the company's highest priority.

The prosecutor's office decided to formally intervene due to the large volume of complaints received nationwide. Separately, the French health ministry is examining three infant death reports where the babies had consumed formula within the recall scope. As of February 11th, the ministry stated a causal link had not been established, and the judicial investigation is ongoing.

**Global Recall**

Nestlé S.A. published a timeline on January 29th, indicating that traces of cereulide were detected in some finished product batches at its Dutch factory in early December. On December 10th, the company notified Dutch authorities, the European Commission, and potentially affected countries, initiating a recall the same day affecting 25 products across 16 European nations.

In January, the Swiss company conducted its first major public recall in Europe, involving brands like SMA, Beba, and Little Steps. Competitors Danone (producer of Aptamil and Cow & Gate) and Lactalis subsequently announced their own recalls. To date, recalls have been issued in more than 60 countries.

Nestlé S.A. indicated the contamination source was traced to a supplier of arachidonic acid (ARA) oil, an ingredient commonly added to infant formula. The crisis has widened as multiple companies and brands used the same supplier, which has not been officially named. The UK Food Standards Agency stated that Nestlé S.A. and Danone have ceased using this ARA oil supplier.

Authorities continue to advise parents and caregivers to check if their formula is part of the recalled batches. On February 2nd, the European Food Safety Authority established a safe threshold for cereulide. Barclays analyst Warren Ackerman noted that due to the rarity of the toxin, no unified standard previously existed. Earlier this month, UK authorities reported at least 36 clinical cases of infants showing symptoms consistent with cereulide poisoning.

**Nestlé, Danone Earnings Reports Due**

Infant formula accounts for approximately 5% of Nestlé S.A.'s total revenue, with the company stating the recalled products represent only about 0.5% of sales. However, Bernstein analyst Callum Elliott commented in January that the larger 5% figure is more relevant considering consumer confusion and brand risk. He added that infant formula is more critical for Danone, estimated to represent about 21% of group revenue, with an even higher contribution to profits.

Both Nestlé S.A. and Danone are scheduled to report earnings later this week, with investors seeking clearer insights into the financial impact of the recall.

**Stock Performance**

Since the start of the year, shares of Nestlé S.A. and Danone have underperformed the European benchmark index, reflecting investor concerns over financial losses and brand reputation damage.

* Nestlé S.A. year-to-date gain: 1.7% * Danone year-to-date loss: 5.5% * Europe's STOXX 600 index gain over the same period: 4.6%

Both stocks experienced significant declines during the peak of the recall in late January but have since recovered some ground.