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Chocs away! Cadbury’s snack will be terribly expensive

September 7, 2009

It’s been a long, long wait for the shareholders in Cadbury. For a profitless decade since the (adjusted) price first hit six pounds, they have been hoping for someone to come along and take their sweets away on the sort of terms they saw being offered to others.

Now the boys (and girl) from Kraft have decided that putting cheese slices together with Dairy Milk chocolate presents an irresistible opportunity. Cadbury had slimmed down by demerging Dr Pepper, its also-ran US soft drinks business. Investors had heard Todd Stitzer, the chief executive, say he wanted to be a consolidator in FMCG, rather than get eaten, and they had decided that he might be right. There was little in Friday night’s price of 568p for a possible takeover.

Swallowing smaller competitors is more fun for the management, but tends to leave the shareholders feeling hungry. When Mars decided to add chewing gum to Snickers, it paid a massive premium for Wrigleys. Bernstein Research, the sector leader, calculates the price at 19.5 times EBITDA, which makes Kraft’s $16.7 billion cash and shares offer for Cadbury look several chunks short of a full bar.

A similar multiple would value Cadbury at 10 pounds, which is why the shares shot past the 745p value of the offer this morning. Given Cadbury’s scarcity value, and the similar efficiency gains that a break-up offer from Hershey and Nestle could extract, this could turn into a re-run of the epic battle for Rowntrees, the UK’s other chocolate maker, in 1988, where the winning offer was twice the pre-bid price.

Yet for all the talk of building “a global powerhouse in snacks, confectionery and quick meals” to rival the reach of Mars/Wrigley, powerhouses do not command high ratings in the stock market. Unilever, for all its valuable brands, currently stands at less than 13 times the latest 12 months’ earnings.

Reckitt Benckiser, the kings of domestic cleaning products, are rated higher, at 16 times. That’s just more than Diageo, the global powerhouse of the drinks industry, on 16 times, but some way below Associated British Foods, which is hugely successful but hardly an international powerhouse, on 20 times. If Kraft is obliged to pay 10 pounds a share for Cadbury, that would represent 26 times earnings.

Paying up – assuming Kraft can find the money – may make sense for Irene B Rosenfeld and her colleagues in the boardroom, with the opportunities for cost cutting and greater martket reach across the world, but from an investor’s viewpoint, it’s far better to be eaten than to eat these expensive morsels.

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