Cadbury gives sweet update, shares unmoved

October 21, 2009

Todd Stitzer and his colleagues at Cadbury must surely have hoped for more. Wednesday’s eagerly-awaited trading update chewed up the outside forecasts and showed there is nothing Flake-y about this business. Growth in sales in the last quarter was 7 percent, against the previous guidance of 4-6 percent. Margins are improving and the future’s coming up Roses.

He might have expected the figures to have lifted the value of the Cadbury business beyond the reach of Kraft, but the share price was hardly changed. There wasn’t even much turnover, reinforcing the pattern since the Kraft approach at the beginning of September.

After a spike on Sept. 7, trading volume quickly sank back to pre-approach levels, while the shares have not moved more than a few pennies from the 794 pence where they ended that day.

By today’s standards, this is curious. The arbitrageurs are conspicuous by their absence, while the bigger holders have resisted the usual temptation to top-slice their holdings. In other words, they believe that Cadbury’s sticker price is 8 pounds, and the upside from a small premium beyond that equals the downside from Kraft walking away.

Kraft now has to decide whether to pay it. Its own update is due on Nov. 3, and its put-up-or-shut-up deadline is Nov. 9. Its shares are not joining in the general surge on Wall Street, implying that investors fear it will overpay, even without Bruce Wasserstein’s encouragement to bid-’em-up.

A hostile bid at 8 pounds risks a fight and an embarrassing defeat, while paying a little more to gain agreement looks like a bid too far — with subsequent further damage to its share price. The approach was clearly well researched, as the details of the cost savings showed on Day One, but unless the Kraft management can engineer a change in sentiment towards its shares, the odds are just in favour of Cadbury escaping.

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