Cadbury cracks

January 19, 2010

The recommended £11.9bn (US$19.4bn) offer by Kraft for Cadbury appears satisfactory to both parties. Kraft gets its prize, ultimately paying 13% more than it initially wanted. Cadbury shareholders receive 48% more than the value of their shares prior to Kraft’s approach.

Cadbury’s board can be pleased they managed to extract so much value when alternative bids seemed unlikely. Kraft’s management, led by Irene Rosenfeld, has remained disciplined helped by the side deal: selling its pizza business to Nestle for US$3.7bn.

Nevertheless, increasing the cash element of its offer to 500p a share, or 60% of the total bid, could cause Kraft some financial headaches, pushing its debt levels to over four times EBITDA. Rosenfeld denies that it will affect the company’s credit rating. If it did, the deal’s rationale would be dented.

That suggests that major shareholder Warren Buffett, who lent Mars US$4.4bn when it bought Wrigley two years ago for US$23bn, could have helped Kraft out on that front. The offer document mentions “alternative financing sources”. Rosenfeld would not comment further.

Another way Kraft could maintain its rating would be if it divested further assets before its £5.5bn bridge financing comes due in one year. Such proposals could have been broached with the ratings agencies. Kraft says the bridge is being amended.

It’s likely Kraft will issue bonds whilst the wind is fair to refinance the shorter term loan. If not, Nestle could be willing to pick up isolated brands, such as Hall’s cough sweets. But Kraft seems unwilling to sell any goodies immediately.

What seems unlikely, given Kraft’s own financial question marks about the enhanced cash-dominated deal, is that Hershey will be able to finance a higher offer before the Takeover Panel deadline of next Monday morning, January 25.

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