THE PENINSULA: Bid for Cadbury: Search for deal that both sides can swallow

10/3/2009 0:41:57
Source ::: FINANCIAL TIMES 

by Jonathan Birchall 

and Jenny Wiggins 

Irene Rosenfeld, chief executive of Kraft, has maintained a full programme of public appearances since her £10.2bn takeover approach to Cadbury last month. But amid talking about women and leadership in Toronto and efforts to combat global hunger in New York, Rosenfeld has kept carefully to her script on Cadbury. 

Kraft has said it will remain “disciplined” in its pursuit of the UK confectionary company, which Ms Rosenfeld told company employees last week was a desirable but not essential acquisition. Kraft maintains that it can finance a formal bid without needing to sell other brands, and that it can do so while keeping the investment grade credit rating on its $20bn (£12.5bn) gross long-term debt. 

The company has also maintained its silence on expectations that it will need to raise its original indicative cash and shares offer of 745p a share, made on September 7, which represented a 30 percent premium on Cadbury’s closing share price of 568p on the previous Friday. 

However, the value of the offer to Cadbury shareholders has been weakened by the 7 percent fall in Kraft’s share price since the bid was announced, partially offset by the strengthening of the dollar against sterling. With Kraft’s share price at yesterday lunchtime in New York at $25.89, the original approach was worth 719p a share, or £9.84bn. 

The strength of Kraft’s third-quarter results, due in the first week in November before the UK deadline for a formal bid, will also be a factor that Cadbury shareholders will consider when deciding whether to take Kraft’s paper. The company is expected to deliver improvements in operating margins, boosted in part by lower commodity costs. Kraft has said it will improve its operating margins to the mid-teens by 2011, up from an adjusted 12.3 per cent in 2008. 

Analysts at Nomura in London argued yesterday that Kraft could raise its offer to 850p a share, which would value Cadbury at 13.5 times 2009 earnings before interest, tax, depreciation and amortisation, and increase the cash portion of its offer from 300p a share to 440p a share. That would be almost a 50 percent premium to the pre-bid share price. 

Nomura said Kraft could afford to raise its offer to 850p and maintain its credit rating, and could appease its investors by increasing the targeted cost savings from a takeover from $625m to $750m. 

Kraft’s original $625m in estimated savings from shared distribution and marketing excludes current cost-cutting efforts at both Cadbury and Kraft. Kraft’s largest shareholders have given no public indications of what they would consider an acceptable price to pay for Cadbury. In his only public comments on the proposed deal, Warren Buffett, who owns 9.4 percent of Kraft’s shares, said he believed Kraft’s original offer already represented a “full price” for Cadbury, given what he said was the undervaluation of its own stock. 

While Kraft says it will not sell brands to fund the bid, it may be prepared to dispose of lower-margin businesses, such as its Maxwell House coffee division or its Oscar Mayer meats as part of its long-term strategic development. In 2007, it followed up its $7.2bn cash acquisition of Danone’s LU biscuit division by selling its Post cereals business to Ralcorp for $1.65bn. 

Kevin Dreyer, research analyst at US fund manager Gamco Investors, which owns about 1 per cent of Cadbury, said the fund would look favourably on an offer towards 860p. He added he had “no issue” with Kraft taking ownership of Cadbury. “There’s a lot of benefit from complementary geographic footprints as well as the greater scale ... certainly Cadbury would benefit from Kraft’s scale,” he said. 

Analysts say Cadbury has done a good job proving to investors it is worth more than 745p a share. Julian Hardwick, analyst at RBS, said: “I don’t think Kraft has won the argument that Cadbury can’t exist as an independent entity.” Cadbury shares closed yesterday at 803p. 

Todd Stitzer, Cadbury chief, told a Sanford Bernstein investor conference last month in London that he was “increasingly” confident the company would deliver on its restructuring plans and that he hoped to deliver a “good” mid-teens profit margin by 2011. Donald Yacktman, whose Yacktman Funds owns 44,200 Kraft shares, said he supported the strategic argument for a merger, but wanted to see how much Kraft was prepared to offer. “It’s not the fit, it’s the price,” he said, noting that for Rosenfeld “this will test her mettle. We’ll find out just how disciplined she really is”.