Kraft’s wait for Cadbury helps square debt circle
Sometimes the wait can be worth it. Kraft’s sweetened offer for Cadbury followed four months of drooling over the British chocolatier that must have seemed like four years for Irene Rosenfeld, Kraft’s chief executive. But the delay had its benefits. Though the cheese and crackers conglomerate will have to raise more money to fund the final deal, that’s become easier and cheaper since Kraft launched its bid.
Kraft’s offer, now agreed by Cadbury’s board, promises a cash component of 500 pence per Cadbury share. That’s a 66 percent increase over the cash part of the lower and more stock-heavy proposal in September. Kraft’s sale of its pizza business to Nestle earlier this month will fund roughly 60 pence of that. Given Kraft’s modest cash holdings, the rest will have to be funded largely with debt — potentially some $10 billion of it.
In November, Kraft received commitments for 5.5 billion pounds ($9 billion) of funding from a cluster of banks including Citigroup, Deutsche Bank and HSBC. That’s still available and along with a separate revolving facility gives Kraft the borrowing capacity it needs. The downside is that the banks are only offering bridge financing that has to be replaced within a year.
Happily for Ms. Rosenfeld, the delay in snagging Cadbury has allowed conditions in the investment-grade corporate bond market to improve. Now, Kraft should have little trouble refinancing these bridge loans in the United States or Europe — and more cheaply than it could have hoped back in September. The average risk premium on better-rated corporate debt has dropped to 1.65 percentage points over Treasury yields, from 2.32 percentage points in early September, according to Barclays Capital.
Meanwhile, Moody’s Investors Service said on Tuesday that it doesn’t expect Kraft to lose its investment-grade rating, even though the company’s total debt load will rise to more than four times earnings before interest, tax, depreciation and amortization, according to CreditSights. That’s good for Ms. Rosenfeld: The investment-grade markets are generally deeper and more accommodating than junk bond markets.
Still, while the passage of time may have paid off for Ms. Rosenfeld getting to a deal, less patience is called for in refinancing Kraft’s bank debt. With the global economy still fragile, the strong credit revival could easily melt away. As soon as Kraft is confident of getting its hands on its British chocolate box, a trip to the bond markets is in order