Will Cadbury prove too rich for Kraft?

September 8, 2009

August may be considered the month of silly news when bankers virtually pack up and retreat to their summer hideaways with their blackberries. But not so for those at Lazard, Citigroup, and Deutsche Bank, left behind to advise Kraft, the world’s second-largest food manufacturer after Nestle, on its bid for Cadbury. Kraft is offering £10.2 billion ($16.75 billion) in cash and stock for the sweets group.

Cadbury’s board, led by its relatively new chairman, Roger Carr and advised by Goldman and UBS, has rejected the offer on the table of 745p per share as too low, even with a 40 percent premium attached. Carr and Chief Executive Todd Stitzer figure they can do a better job on their own.

Analysts had caught a scent of the deal in July, but they had not expected one to come so soon. News of Kraft’s late-August approach broke on Monday, pushing Cadbury’s shares up toward the 800p mark – a valuation analysts said was more realistic, and one that Cadbury’s board might be willing to recommend to its shareholders.

Indeed, Kraft’s chairman and CEO Irene Rosenfeld wants to do a deal, but preferably on friendly terms and one that does not jeopardize Kraft’s investment-grade rating. She is acutely aware that Cadbury would give Kraft access to high-growth gum and emerging markets and create a massive food giant with $50 billion in revenues. She expects a deal to translate into $625 million in savings per year.

While there is now talk of Nestle and Hershey making a spoiler bid – with the former taking Cadbury’s gum business and the latter taking chocolate – Nestle’s chief executive Paul Bulcke didn’t appear too sweet on a counter-offer, responding to the news by stating he has no plans for big acquisitions in 2009 and 2010.

Nestle is awash with cash, while Kraft is already heavily leveraged – more so than its biggest rivals. This has helped to fuel the speculation. And with £4.1 billion in cash already baked into the deal, raising the bid could prove to be a tall order for Kraft if Cadbury were to become irresistible.

(Adam Durchslag writes for Acquisitions Monthly)

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