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Kraft will need to sweeten Cadbury offer

September 7, 2009

CADBURY/Kraft’s cash and stock offer for Cadbury may not have passed muster with the target’s board. But while this is not yet game over, it now looks likely that someone will make a snack of the British confectionery group.

Cadbury’s shares have basically tracked the FTSE for years — despite the efforts of Chief Executive Todd Stitzer to liven up the group’s performance, including demerging its U.S. soft drinks.

But while a takeover has long been on the agenda and Irene Rosenfeld — Chairman and CEO of the U.S. group — makes a convincing argument for combining the two companies, she will need to sweeten her bid to force Cadbury to the table.

Expectations of a higher bid mean Cadbury shares flirted with 800 pence per share, versus the 745 pence value of Kraft’s outline offer. Some analysts believe the price could go far higher. If you take the 19x EBITDA multiple paid by Mars for Wrigley chewing gum last year and apply it to the Cadbury gum business while putting a 13x EBITDA figure on its chocolates, Evolution Securities estimates the price on offer should be as high as 1,100-1,200 pence.

The bid has revived memories of Nestle’s takeover of Rowntree, another quoted British confectionery maker, in the summer of 1988. After a fierce auction, the Swiss group paid a premium of more than 100 percent to the pre-bid price.

But whether shareholders achieve such a toothsome outcome depends on whether a counterbid emerges from Nestle or another group. Nestle won’t want to see Kraft establish such a strong position in the growing confectionery sector, but while the Swiss company could squeeze more costs out of a combination it would face greater competition issues if it made a bid.

However, if the world’s largest food group were to team up with Hershey  to make a break-up bid for Cadbury it might be able to by-pass such competition hurdles. Nestle is not ruling out a counterbid, but on Monday reiterated it had no plans for major acquisitions in 2009 and 2010.

In the absence of an auction, a stellar outcome looks less likely. But Rosenfeld could probably afford to increase her bid to win Cadbury’s agreement. She is promising $625 million (380 million pounds) in annual synergies, with almost half of this coming from operational and procurement savings, a third from general administration and the rest from areas such as marketing. Taxed and capitalised, these look to cover the 2.4 billion pound premium Kraft is offering with a bit left over. And it is likely that the bidder could find a few more savings if pushed.

Either way the Kraft chief and her many advisers will probably need to dip into their purses again before Cadbury comes under pressure to hand over the keys to the chocolate factory. But given the straitened state of the M&A market, the target’s shareholders would perhaps be ill advised to hold out for a Rowntree re-run.

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