Commentaries

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.

Schh…Orangina Schweppes bound for Japan

There’s an almost palpable sigh of relief in the statement from Blackstone and Lion Capital confirming the two private equity firms have received a “binding offer” from Japan’s Suntory for Orangina Schweppes.

It discloses little beyond Blackstone and Lion saying they will only be able to decide whether to accept the offer “once the necessary social, legal and regulatory steps will have been completed”.

All that of course involves lots of red tape — so it may take some time — but you can be sure Blackstone and Lion will be doing everything they can to speed the process along — wishing the days away and hoping that their luck holds.

Finding a buyer like Suntory apparently willing to pay somewhere between $2.6 and $3 billion for Orangina at this point in the cycle gives Blackstone and Lion the perfect exit. Suntory could be paying them up to twice 2008 sales and more than they paid in 2006 to get hold of Orangina and its European brands.

The duo crow that since they took over in 2006, Orangina has “achieved industry-leading growth, both organically in its core countries and by expansion into new markets, and through strategic acquisitions of leading brands”. Volumes and sales have both risen and Orangina Schweppes is now the second largest producer in Europe’s still soft drinks market.

Blackstone’s chief operating officer Tony James said last week that the private equity group would look to get out of investments if there was an opportunity for long-term value and noted that flotations are once again a possibility.

That begs the question why Blackstone — with $28 billion in its coffers to invest — and Lion have decided to go with Suntory rather than an IPO for Orangina.

D.Telekom JV could jump Sprint hurdles

Deutsche Telekom is struggling in two of its most important international markets and desperately needs to find a quick fix. Its proposed joint venture with France Telecom is a graceful way to establish a leading position in the UK market. But buying Sprint Nextel in the United States looks far less sensible.

A takeover of its rival would catapult Deutsche Telekom past AT&T and Verizon to U.S. number one position. However, the deal looks a costly way to get its operations there growing again. Talk of a bid for Sprint Nextel by T-Mobile USA — the business Deutsche Telekom acquired when it bought VoiceStream in 2000 — is hardly new.

But Monday’s fall in the German company’s share price on the latest report that it is looking at a bid suggests investors still have misgivings about the idea.

After all, Deutsche Telekom forked out $25 billion in shares and cash to buy VoiceStream at the top of the market, piling on debt which almost brought the telecoms group to its knees but failed to deliver the major market presence it wanted. Its strategy since then has been all over the place. It first looked at selling  the U.S. business, before apparently changing tack by considering buying a rival.

It’s no wonder investors are jittery. For while a combination of T-Mobile USA and Sprint Nextel could address some of the problems, the cost to Deutsche Telekom would be huge. Sprint Nextel, itself formed through a merger at the end of 2004, is heavily leveraged: its net debt of $20bn is almost double its market capitalisation of $11 billion. But Deutsche Telekom, which is valued at around $60 billion, is already carrying net debt of nearly $65 billion (as of June 30).

Any takeover would also require a premium of, say, 25 percent to win over Sprint Nextel’s shareholders. Persuading Deutsche Telekom’s shareholders — including German state lender KfW with nearly 17 percent of the company and the German government with almost 15 percent — to throw yet more money at the U.S. in an effort to make up for past mistakes would be a hard sell.

Loading more debt onto the combined business might also prove a stretch. Any takeover of Sprint Nextel would almost certainly hit Deutsche Telekom’s credit rating, which Fitch recently lowered to BBB+.

Goodnight Irene, goodnight, love from Roger

An early draft of Cadbury’s weekend response to the bid approach from Kraft has fallen into my hands.

Dear Irene B Rosenfeld

As you already know, we’ve already spattered your unsolicited takeover proposal with the corporate equivalent of Creme Egg goo, but I thought I’d follow up for the slower members of your board. We really don’t like the idea of being swallowed up by some amorphous conglomerate at a knockdown price simply because nobody wants your extruded Dairylea cheese-style sections anymore.

In case you hadn’t noticed, we’ve turned ourselves into the chocs’n'gum kings (well, princes, anyway, since Mars is the one we all have to beat). We’ve put those tooth-rotting fizzy sugary drinks back onto the shareholders (the performance of Dr Pepper Snapple since then rather shows how little we really knew about the business) and we’re now a pure play confectionery company.

We’re unique. We’re impossible to replicate. We’re close to being a national treasure, and I hardly need to remind you of the price that Nestle was forced to pay for Rowntree once the board had decided to play that card (twice the “undisturbed” price, if memory serves).

Then consider the quality of our management, the momentum of our business, the power of our brands, the strength of our market position and the spread of our global footprint. Golly, we’re close to perfect. You really need us far more than we need you!

And another thing: you’re not even offering real money – because you really can’t afford us. Why should our shareholders take shares in a company with a less focused business mix and historically lower growth? 

Kraft will need to sweeten Cadbury offer

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.

Chocs away! Cadbury’s snack will be terribly expensive

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.

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.