Commentaries

If Xstrata is to shut up on Anglo it should say so

Only a week to go before decision time and it looks increasingly as though Xstrata boss Mick Davis has already made up his mind and opted to walk away from making a formal bid for mining rival Anglo American.

Reuters correspondent Raji Menon quotes an unnamed top-10 shareholder in Xstrata saying: “They have pretty much indicated to us that they will be walking away”.

This makes sense – nothing has changed since Xstrata got a “put up or shut up” notice from the UK’s Takeover Panel, giving it until October 20 to make a formal offer or walk away for six months.

If Xstrata has indeed made up its mind, it should waste no time in telling investors that it has no plans to make an offer. Why wait?

Takeover Panel sets Cadbury clock ticking for Kraft

So Cadbury has succeeded in convincing the UK’s Takeover Panel — the City of London body which polices M&A — to slap a “put up or shut up” order on Kraft.

Kraft now has until Nov. 9 to decide whether to make a formal offer for the British confectionery group. If it decides to walk away, it is not allowed back for six months.

Cadbury shares are still trading above the price of Kraft’s informal stock and cash offer. At just over 8 pounds per share, the current price is some 10 percent above the indicative offer, which is now worth just 7.20 pounds. But shareholders in Cadbury — which is a household favourite in the UK — aren’t being that ambitious in their expectations for an improved offer. The shares are trading at nowhere near the multiples which were initially bandied about after Kraft’s approach became public.

And despite noises about Kraft finding it difficult to raise the money it needs for the 11 billion pound bid – of which some 4.1 billion pounds would be in cash — bankers seem to think there won’t be any problem getting lenders to make the necessary loans.

The real question is how far Kraft shareholders are willing to let CEO Irene Rosenfeld stretch to get her hands on Cadbury’s famous chocolate and chewing gum brands.  Kraft stock fell another 1 percent following the Takeover Panel ruling, having dropped around $2 from above $19 to $17.6 since it went public with its approach to Cadbury.

Cadbury, which has rejected the approach, will be hoping that based on the performance of Kraft shares, Rosenfeld will be kept on a fairly tight leash.

Stitz-up at Merrill Lynch?

Was it a gaffe or was the poor man misquoted? We certainly have two very different accounts of Todd Stitzer’s contribution to a closed conference at Merrill Lynch on 22 September. Maybe it would be better if these sort of briefings just didn’t take place.

According to a Merrill specialist salesman, who jotted down his remarks, Cadbury’s chief executive devoted his entire performance to sharing some thoughts about Kraft’s bid proposal. This was a pretty sensitive subject to pick but, hey, these were serious investors. So he allegedly indicated the possible exit price and the scale of the possible synergies from the deal. The salesman noted that:

Todd admitted that there is some strategic sense in combining the two companies and he doesn’t expect Kraft to walk away, so he said his job is to get as much value as possible.

Stitzer has now clarified his words, most likely at the behest of the Takeover Panel. This statement comes straight out of the circumlocution office and reads: 

For the avoidance of doubt, Mr Stitzer does not believe that Kraft’s proposal makes strategic or financial sense for Cadbury and his comments should not be interpreted in any other way.

 A spokesman added that Stitzer had been “seriously misquoted”.

Hmm.

Cadbury’s Kraft sugar rush overdone

Kraft’s offer for Cadbury got off to a sticky start on Tuesday when the U.S. food group’s stock fell 6 percent, taking some of the buzz out of Cadbury’s bid-fuelled share price.

Kraft’s initial offer has raised expectations of a higher bid, but while it is likely to have to pay more to win, the take-out prices now being touted are stretching the value of the British confectionery group further than a Curly Wurly.

The multiple paid by Mars to Wrigley — some 17.5 times EBITDA — has encouraged analysts to look for a valuation of 15-16 times forecast 2009 EBITDA, implying a price of 10 pounds or more, against Kraft’s 7.16 pound per share offer after the fall in the Kraft price. The Cadbury share price also gave up some of its gains, but is still well above the value of the bid.

But comparisons with the Wrigley takeover and recent deals — the average multiple for big food deals has been 14 times EBITDA over the last 10 years — do not adequately factor in the higher cost of capital since the Mars deal. As a private company, Mars could also pursue a fully-priced bid without rattling its shareholders.

Cadbury’s shareholder base is now heavily skewed towards the United States and there will certainly have been changes since the offer was announced, with arbs leaping in at the prospect of a rare bidding war. Cadbury may be a British institution, but British institutional investors are conspicuous by their absence from the share register. This raises the chance of the company’s fate being decided by these newly-arrived shareholders.

But while Cadbury is a natural fit with Kraft, those expecting more cash in a raised bid may be disappointed.

Kraft is going to be constrained in how far it can push without ringing alarm bells at the ratings agencies. Analysts estimate Kraft’s net debt/EBITDA would rise from three times to four times based on the price it has already offered.

Anglo dresses interims up as a defence

    Anglo American hasn’t yet received a formal bid from Xstrata. But the miner’s interim results read very much like a defence document.     The highlights alone give a pretty good idea of what chief executive Cynthia Carroll and new chairman John Parker will focus on if Xstrata does eventually pounce.     Anglo’s case hinges on four things.     First, that its plan to cut $2 billion of costs by 2011 is ahead of target. Second, that it is getting on top of its $11 billion net debt, and third, that progress is being made in restructuring its problem child Anglo Platinum <AMSJ.J>. Lastly, Anglo acknowledges that it is an objective to reinstate the dividend.     Added to these elements, lest they appeared to have too defensive a flavour, is the promise of growth, largely through its Minas-Rio iron ore project in Brazil and its Los Bronces copper development.     Of these, cost savings are a crucial point of contention in the Xstrata debate, with the rival miner’s chief executive Mick Davis confident he can squeeze a further $1 billion out of a combination with Anglo, taking the total to $3 billion.     Anglo isn’t making any promises beyond those already given but the tone of the language — which includes talk of being ahead on “asset optimisation”, procurement and job reductions — hints that it may be able to find more savings on its own, without handing anything to Xstrata.     So far the market seems largely happy to let Carroll stick to her plan — highlighting Anglo’s leading position in platinum, diamonds and iron ore alongside its cost cutting success. But investors might ask more searching questions in the event that Xstrata did come back offering a premium.