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Cadbury’s Kraft sugar rush overdone

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KRAFT-CADBURY/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.

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