Bid target

7th Sep '09 by emptyend

22 comments 5721 reads

Cadbury has of course long been considered a bid target, due to its brand strength, especially in the UK.

Today a bid from Kraft has been made and rejected, according to the BBC

Full details in a Kraft announcement here: http://www.investegate.co.uk/Article.aspx?id=200909070700106087Y

Kraft are also holding a webcast to discuss it: http://www.investegate.co.uk/Article.aspx?id=200909070705006088Y

No direct statement from Cadbury's yet - but I bet I know one director who will have been choking on his weekend cornflakes!....http://www.investegate.co.uk/Article.aspx?id=20090904083818PC52C

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About the Author

Emptyend

Premium Member

22 comments

emptyend

7th Sep '09

In reply to CityTrader (post #1)

Wouldn't rush to assume that. I see the shares are at a premium to Kraft's 745p sighter.....currently 775p or so.......

.....I'd certainly think that other bidders will be flushed out - and I'd doubt that a deal will be done much under £9. As ever, though, the question is one of "fit" - and I suspect that the fit with Kraft might be rather better for other stakeholders than if other companies outbid them.

It will be very interesting to see exactly what Cadbury have to say later.

djpreston

7th Sep '09

In reply to emptyend (post #3)

To be honest it looks like game over for CBRY IMO. Not a question of it staying independent just a matter of who and at what price.

Surely the best fit would probably be Nestle following on from the Rowntree acquisition all those years ago - better overlapping distribution etc but possibly (probably) more likely to fall foul of competition commission problems given the % owned of UK confectionary market?

emptyend

7th Sep '09

To be honest it looks like game over for CBRY IMO. Not a question of it staying independent just a matter of who and at what price.

You might think so - but I wouldn't rule out a sweetheart deal with Hershey. See their list of FAQs...... ;-)

It was always touted as a merger candidate, given the limited competition issues (both having big domestic market shares but limited international presence).

emptyend

7th Sep '09

Cadbury statement

....extremely brief!

Looks to me as if they may have been caught cold. If this is the best they can do......

.......conditional on, inter alia, financing and due diligence.
The Board of Cadbury reviewed the proposal with its advisers and rejected it

...then it may well become just a matter of time and price?

Interestingly the Alphaville blog has alighted on the letters sent by Kraft which I would think will spark some pressure on Cadbury's from their institutional shareholders ....who will certainly want to know what Cadbury's plan B is!!

SW10Chap

7th Sep '09

In reply to djpreston (post #4)

just a matter of who and at what price.

It seems to me that a organization such as PepsiCo, who own UK-focused brands in snacks, cereals and fruit juices - as well as fizzy drinks - could also be interested.They've got all the distribution and marketing in place, a few dodgy sweets and snack bars might just fill a hole.

SW10

djpreston

7th Sep '09

In reply to SW10Chap (post #7)

It seems to me that a organization such as PepsiCo, who own UK-focused brands in snacks, cereals and fruit juices - as well as fizzy drinks - could also be interested.They've got all the distribution and marketing in place, a few dodgy sweets and snack bars might just fill a hole.

SW10

Aye thats true but my money has to be on an existing confectionary giant and there's really only three that would do the job i my mind:

Kraft - no real overlaps and thus minimal competition concerns.

Nestle - arguably the best placed to wring out extra returns but a nightmare when it comes to the competition angle - possibly a bid then dismemberment of some brands or an interested third party to take on some brands?

Hershey - as EE said, this has been mooted for years now as a merger candidate but Hershey is a slow bugger (and their chocolate always reminds me of vomit). That might be the White Knight option but I doubt it will happen, CBRY is a done deal just depending on price....

There is always Mars, which of course bought out Wrigleys. There is an obvious overlap in gum and again horrendous problems from a competition angle.

As you say, Pepsico could go down that route given the snack overlap and distribution muscle but I just dont see it myself - a bit like rebuilding Cadbury Schweppes after the demerger of Schweppes?

Any other party (possibly inlcuding Hershey) is, IMO, too small to afford a deal unless it was a merger for paper and I just dont see any merger deal offering the same return for many years so the instos will want to exit cleanly.

Then again, WDIK?

emptyend

7th Sep '09

In reply to djpreston (post #8)

Defensive merger (for paper) with Hershey I think...... Hershey is a loser if the Kraft bid goes through and they'll have some of their strategic options crimped if they don't merge with Cadbury. They are TERRIBLY slow though - but I suspect that the Kraft bid may put the required bomb under them?

Meanwhile, up in the Valleys, the hills are doubtless echoing to the sound of "bugger!".......Shotaa was a holder for years but sold out at 525p a few years back IIRC.

Its a good illustration of the time it takes for major M&A deals to happen - I remember discussing the prospects/risks for a Cadbury and Hershey deal back in my banking days in the mid 1990s!!

Fangorn

7th Sep '09

Yes, plenty of buggers here to as I was looking to pbuy them this morning only to see them shoot away from my targetted entry price. Oh well.

djpreston

8th Sep '09

Some comment on the Cadbury deal over on Alphaville today (near the start):

http://ftalphaville.ft.com/marketslive/

A decent extract of a comment by Merrill on the financial constraints facing Kraft:

A bid price of 850p would imply a 13.5x ‘09E EV/EBITDA excluding synergies,
which is marginally below other recent deals. Including the $625m synergies the
multiple reduces to just below 10x, approximately 10% above the sector multiple.

Therefore from a Cadbury shareholders perspective an 850p bid would imply
receiving the full NPV of the $625m synergies plus fair value for the existing
stand-alone Cadbury business. Synergies are likely to be higher than the 6.5% of
sales, and could be as high as 10%. We emphasise that an 850p bid does not
include any control premium for what we view is a unique asset and brands.

MJ
Why do we feel Kraft is unlikely to pay more than 850p?
Ex-competing bids we feel Kraft is unlikely to lift its offer materially above 850p as:

?? In order to maintain an investment grade rating, any incremental funding for a
raised offer would have to be equity, making the transaction exponentially less
attractive to Kraft on short term earnings enhancement or WACC measures.

?? The risk remains that the Kraft share price declines when the US markets reopen
on Tuesday, reducing the value of the bid to Cadbury shareholders while
also making any increased (equity financed) offer more expensive to Kraft.
With a revised bid likely we lift our PO to 850p but stay Neutral, believing an
expectation of a higher bid is now reflected in Cadbury’s share price

emptyend

8th Sep '09

Why do we feel Kraft is unlikely to pay more than 850p?
Ex-competing bids we feel Kraft is unlikely to lift its offer materially above 850p

I don't disagree with that view. The central question is whether there will be competing bids - and if there aren't then the institutions may be left with a tough choice? They "ought" to get a further premium for control - but perhaps won't hang out for one? OTOH it won't be an easy stock to replace in some portfolios?

djpreston

8th Sep '09

In reply to emptyend (post #12)

OTOH it won't be an easy stock to replace in some portfolios?

Indeed, its a fairly unique asset given its collection of assets and the replacements are less "pure" in terms of confectionary exposure so Id imagine that the money will be recycled into other global consumer good companies like Kraft, Nestle, SAB etc but for UK focussed funds more likely ULVR or RB?

As for the tough choice - indeed. Not accepting the offer will mean a sharp fall and then a long (years?) wait till values reach this level again. As a result, a deal is odds on to be sealed if a figure beginning with an 8 can be presented. All eyes now switch to the US open to see where Kraft goes today.

I do like the paper offer element sold as a way of maintaining an exposure to a growing business (not to reduce the need for debt financing). Alsothe political angle of offering to keep open UK production facilities that woudl otherwise have closed. That will look good to Gormless Gordon...

doverbeach

1st Nov '09

Kraft may play it cool, says article in the Telegraph: http://www.telegraph.co.uk/finance/comment/kamal-ahmed/6473892/No-room-for-soft-centres-in-Cadbury-fight.html

there's the issue of other bidders and the fact that, well, there aren't any. Ms Rosenfeld has been asking colleagues: "Why should I bid against myself?", which suggests that there may not be as radical an upward movement in Kraft's bid as Cadbury hopes. Out of the possible contenders, Kraft believes that Hershey's is too small to bid and, being run by a relatively conservative trust, is not up for an adventurous takeover battle; Nestle would face serious competition issues in the UK and PepsiCo has its own large-scale challenges in integrating its newly acquired bottling businesses to focus on another deal.

Friends of Cadbury

29th Dec '09

Should the government intervene on the Cadbury takeover?

Mark Kleinman's blog on the subject is interesting and several comments on his article have indicated support for the British government to intervene: http://bit.ly/8EB4oG

Lord Mandelson made clear that he was acutely aware of the strength of feelings generated by the take-over bid. He said Cadburys was a major UK company and it was important that any acquirer of Cadbury's respect the company's heritage and workforce.

Friends of Cadbury, a social network run by supporters of Cadbury

MrT

6th Jan '10

The Sage has apparently spoken out against the deal, although this article argues that this may actually favour Kraft's prospects of making it happen - http://www.forbes.com/2010/01/06/kraft-cadbury-buffett-markets-equities-bid-shares.html

This may have actually been welcome news for Kraft Chief Executive Irene Rosenfeld, who has watched Kraft's shares flag since September of last year, when they dropped from $28 to around $26. Rather than be embarrassed about Buffett's "scolding," which he could always have done to Rosenfeld in person, she and her management may quietly appreciate the billionaire's public comments.

"He is not saying 'no' to an acquisition of Cadbury per se but a 'no' to giving Kraft management a blank check to change the deal in any way they wish from the deal presented to shareholders, and that they expect Kraft to further change their offer, i.e., an increase," said Gary Paulin of London brokerage Aviate Global. "The result of this has been very favorable to Kraft's chances of securing Cadbury at an attractive price, which was undoubtedly Buffett's aim."

Fangorn

6th Jan '10

I get the impression this deal is going to fall by the wayside. Kraft simply will be unable to life their offer to the Eight pounds or so the board of Cadbury would consider selling for, and there don't seem to be any other suitors in the offing. Nestle has formally pulled out, and Hershey simply don't have the firepower.

With Krafts bid currently standing at circa 749 or so, investors wont be jumping to accept. With the inevitable falling away of the bid, Cadburys will revert to six pounds or so. A short for the brave imv at current levels

emptyend

6th Jan '10

In reply to MrT (post #16)

"He is not saying 'no' to an acquisition of Cadbury per se but a 'no' to giving Kraft management a blank check to change the deal in any way they wish from the deal presented to shareholders, and that they expect Kraft to further change their offer, i.e., an increase," said Gary Paulin of London brokerage Aviate Global. "The result of this has been very favorable to Kraft's chances of securing Cadbury at an attractive price, which was undoubtedly Buffett's aim."

This is an interesting way to play things. A game of bluff - rather like playing poker, for which Buffett is well-known. The question is, what happens if someone calls the bluff? Does Buffett benefit if Kraft are fended off by Cadburys and Kraft management's strategy is discredited? Will a management who cannot execute their strategy and so are stuck in what is clearly an intrinsically low-growth set of businesses help the Kraft share price - or not?

And what would the ethics be of a major and extremely influential shareholder being effectively in cahoots with management in perhaps trying to mislead the market? There is no suggestion about that of course - but in the circumstances (a win/win for Kraft and its shareholders if they can bluff Cadbury holders into selling out cheaply) one surely cannot avoid some tiny suspicions, as the Forbes article implies......

emptyend

18th Jan '10

Looks like the Wispa is that the Cadbury Breakaway has been Crunchied:

http://news.bbc.co.uk/1/hi/business/8466829.stm

Kraft Foods may increase its bid for Cadbury to a level that is accepted by the UK chocolate-maker, BBC business editor Robert Peston has learned.

He says the US giant may raise its offer to between 840 and 850 pence per share, which at 850p would value Cadbury at £11.7bn.

Kraft launched its hostile takeover bid for Cadbury in December, having its previous offer of 761p rejected.

The two firms may jointly announce the successful bid on Tuesday morning.

Not sure where that will leave Hershey but presumably any agreed deal will contain an expensive break clause.

nigelpm

18th Jan '10

too cheap by all accounts. I'd have thought the institutions should tell them to do one unless the offer starts with a "1"!

Fangorn

20th Jan '10

Wow 850/sh. have to say I'm surprised Kraft were able to raise their bid so high. Wonder how they're intending on financing it as this new bid entails what Warren B would describe as going for broke! Wonder what the sage of Omaha is thinking about the revised terms

Fangorn

20th Jan '10

Ah and there we have it - the Sage's comments.

"Jan. 20 (Bloomberg) -- Warren Buffett would vote against Kraft Foods Inc.’s takeover of Cadbury Plc if given the chance because the foodmaker is overpaying, he told CNBC.

“I think it’s a bad deal,” he said on the business news network today. “I have a lot of doubts.” Buffett is chairman of Kraft’s biggest shareholder, Berkshire Hathaway Inc. "

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Emptyend

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