DealZone

Carefully Krafted

January 5, 2010

NESTLE/(Acquisitions Monthly) Nestle’s neat moves over the New Year put it in pole position to help carve up Cadbury. The Swiss company’s decision to exercise its US$28.1bn option to sell its remaining Alcon shares to Novartis gives it the firepower to control the fate of the British confectioner.

Nestle’s strong balance sheet, enhanced further by the Alcon agreement, has made it the one obvious alternative bidder to Kraft for Cadbury. The latter is now worth just US$17bn after today’s 3% fall to 778.5p. However, Nestle has done a superb job at putting the market off the scent.

Rationally, the group’s position as the second largest UK chocolate producer should rule it out from making a bid. That is still the case. As Nestle stated this morning, “it does not intend to make, or participate in, a formal offer for Cadbury”.

Chief executive Paul Bulcke has consistently said that he does not want to undertake a major acquisition, preferring to focus on bolt-on deals. The US$3.7bn purchase of Kraft’s frozen pizza business falls into the latter category.

However, Nestle’s market value is more than treble that of nearest peers Kraft and Unilever. Cadbury is worth just a tenth of Nestle, making it pretty digestible. Cadbury’s non-chocolate parts, such as Hall’s cough sweets, would be even more consumable.

If Kraft can gain control of Cadbury, bolstered by the cash from the pizza divestment and secure funding from its bank syndicate, then Nestle can pick up prize assets that Kraft might have to sell to reduce debt.

Nestle’s masterstroke was allowing long standing adviser Credit Suisse to join Kraft’s syndicate. The market thought that ruled out Nestle from any designs on Cadbury. But if Kraft wins the bid, then Nestle can start selecting its choice Cadbury goodies.

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