Cadbury/Ferrero, a sweet dream
There are good reasons for Italian chocolatier Ferrero to consider a combination with Cadbury. The British group, fighting a hostile takeover from Kraft, is also bound to welcome any suggestion of a rival bid. But an alternative deal looks a long shot.
It’s perhaps surprising that Ferrero’s name has not surfaced earlier in the speculation about counter-bidders for Cadbury. The family-owned group — whose delicacies include Ferrero Rocher, Kinder, Tic-Tac and Nutella — is in some ways a natural fit for Cadbury.
With revenues of 6.2 billion euros in 2007-2008, Ferrero’s sales are on par with Cadbury’s. And they are concentrated in Germany, Italy and France, with little overlap in Britain.
Little more is known about the secretive group’s finances. Although Michele Ferrero has handed over the running of the Piedmontese company to his sons Pietro and Giovanni, he has so far eschewed acquisitions.
Even so, there is some logic to a combination. Analysts at Nomura estimate the two companies could deliver savings of 350 million pounds ($587 million), some 3 percent of their joint sales — not far behind Kraft’s $625 million synergy target.
These savings could be worth 140 pence per share for Cadbury shareholders, assuming that the British company ended up with half of a merged entity. The question is whether it is possible to structure a deal that makes sense for both sides. A full takeover by Ferrero looks far-fetched. An offer at 8 pounds per Cadbury share — the price shareholders appear willing to accept — would cost Ferrero close to 11 billion pounds. It would also have to assume Cadbury’s net debt of 1.8 billion pounds. That would have been a stretch even at the height of the credit boom. Today it is verging on the impossible — especially as nine of the world’s largest banks are already financing Kraft.
A more credible alternative would be for Ferrero to team up with another bidder. However, an alliance with Hershey would be tricky because both companies covet Cadbury’s chocolate
business. Joining forces with Nestle, which could be interested in Cadbury’s chewing gum brands, would make more sense. But a carve-up might be too messy for the Swiss group to take seriously.
The most feasible option would be for Cadbury to merge with Ferrero, leaving the family with a large shareholding in the combined business. Even assuming the Ferrero’s were willing to give up control, however, it seems unlikely that Cadbury shareholders would choose this deal over the alternative of selling out to Kraft.
Cadbury shareholders have so far been left cold by reports of Ferrero’s interest. The shares, which are trading at a 7.5 percent premium to the implied price of Kraft’s cash and share bid, have not budged much above 7.80 pounds in the last month.
Cadbury will welcome any talk of a rival bid as it seeks to squeeze a better offer out of Kraft. But it is hard to see Ferrero coming to its rescue.