By Andrew Cleary and Sarah Shannon
Sept. 7 (Bloomberg) -- Kraft Foods Inc., the second-largest food company, said it will pursue a takeover of Cadbury Plc after the British maker of Trident gum and Dairy Milk chocolate rejected a 10.2 billion-pound ($16.7 billion) bid.
Cadbury shares soared 38 percent, pushing its market value above the bid price. Kraft’s 745 pence-a-share proposal may trigger rival offers from Nestle SA and Hershey Co., forcing Kraft to raise its bid, analysts said.
Kraft, the maker of Oreo cookies and Kool-Aid drinks, said today that buying the U.K. company would create a “global powerhouse” with annual revenue of about $50 billion. Evolution Securities analyst Warren Ackerman estimated that Cadbury may be worth as much as 1,200 pence a share.
Kraft’s bid “might seem attractive, but we think Cadbury can get much more,” said Andrew Wood, an analyst at Sanford C. Bernstein in New York with an “outperform” rating on Cadbury shares. “It makes perfect sense for Kraft to acquire Cadbury.”
Northfield, Illinois-based Kraft plans to offer 300 pence in cash and 0.2589 new Kraft share per Cadbury share, valuing the confectioner at 31 percent more than last week’s close. Cadbury said the bid “fundamentally undervalues” the company.
“It’s clearly hostile,” Andy Smith, an analyst at Icap Plc in London, said by phone. The deal is a “near perfect geographical fit. It’s unlikely Kraft will just walk away.” Smith said the U.S. company may need to raise the bid’s cash component to get Cadbury to agree to a sale.
Possible Counterbid
Kraft said its announcement aimed to “encourage and further” dialogue with Cadbury after its approach was rebuffed.
Cadbury shares jumped 215 pence to 783 pence in London trading, after having risen to as much as 808 pence in earlier trading. More than 62 million shares were traded, more than 12 times the daily average for the last three months.
Legal & General Investment Management Ltd., Cadbury’s biggest shareholder, said that Kraft’s offer “materially undervalues” the U.K. company and that it supports Cadbury’s management in rejecting the approach.
“There is a reasonable chance that Nestle/Hershey could counterbid, with Nestle taking gum and Hershey taking chocolate,” Evolution’s Ackerman said in a note. Nestle declined to comment today.
Kraft’s shares fell about 1 percent to the equivalent of $27.68 in German trading and are little changed this year. U.S. markets are closed for Labor Day.
The U.S. company is “very weak” in the U.K. and strong in markets such as Brazil and Scandinavia, where Cadbury is “not a player,” Icap’s Smith said. Kraft also lacks expertise in gum, which Smith called the candy market’s “most attractive space.”
Mars, Wrigley
Ackerman, who rates Cadbury “buy,” estimated the chances of a counterbid at 30 to 40 percent. He said it was “inevitable” that Cadbury would be bought after Mars Inc. acquired chewing-gum maker Wm Wrigley Jr. Co. in 2008.
Kraft’s biggest shareholder is billionaire investor Warren Buffett, whose Berkshire Hathaway Inc. owns a stake of almost 10 percent. Buffett has invested in candy mergers before, funding part of Mars’ purchase of Wrigley.
With Cadbury, Kraft would match Mars’ 15 percent share of the global candy market, Evolution’s Ackerman also said, with Cadbury’s strengths in gum in Latin America and Europe complementing Kraft’s chocolate business in those regions.
The timing of the approach may not appeal to Cadbury Chief Executive Officer Todd Stitzer, who is halfway through a four- year plan aimed at raising the company’s operating margin from 10 percent in June 2007 to a “mid-teens” percentage by 2011.
Closing Factories
The CEO has closed inefficient factories from Turkey to Spain and is delivering profitability improvements ahead of his own target, according to Icap’s Smith. Kraft will have to pay “even more” in two years time if it waits until the efficiency program is completed, he added.
“We do not anticipate any issues with financing the transaction,” Kraft Chief Executive Officer Irene Rosenfeld said on a conference call. “We have good access to debt. We don’t currently plan to tap the market for equity.”
Kraft said a combined company would have potential to realize annual pretax savings of $625 million at a cost of $1.2 billion over three years. Expenses would be cut by combining manufacturing operations, marketing and management.
A “reasonable multiple” for the acquisition would be 15 to 16 times earnings before interest, tax, depreciation and amortization, or between 1,000 pence and 1,070 pence per share based on forecast 2009 earnings, Bernstein’s Wood said.
‘Growth Potential’
Mars paid 19.5 times ebitda for Wrigley in April 2008, and “arguably Cadbury has much more profit growth potential than Wrigley had at that time,” Wood added. Evolution’s Ackerman said that valuing Cadbury’s gum business on the same basis as Wrigley’s, and its chocolate unit at 13 times ebitda, would give Cadbury a value of 11 to 12 pounds per share.
Shares of Nestle, the world’s biggest food company, rose 1 percent in Zurich trading. JPMorgan analyst Pablo Zuanic has said Nestle should acquire Cadbury to become a stronger competitor to Mars.
Chief Executive Officer Paul Bulcke, speaking at a Swiss press conference today, declined to comment on Kraft’s bid, though he said Nestle is open to takeover opportunities. He said the company’s previous guidance of a takeover budget of 1.5 billion to 2 billion Swiss francs for this year stands.
Cadbury has been mentioned as a potential bid target by analysts since it became a pure confectionery company after spinning off its Dr Pepper drinks unit in May 2008, prodded by U.S. activist investor Nelson Peltz. Peltz retains a stake in Cadbury and also holds Kraft shares.
Kraft’s last acquisitions worth more than $1 billion occurred in 2007, according to Bloomberg data, including the $7.8 billion purchase of Groupe Danone SA’s biscuit unit.
Growth Targets
Kraft said a deal would be “accretive” to earnings in the second year after completion and help raise its long-term revenue growth target to more than 5 percent from over 4 percent. Its goal for per-share earnings growth would increase to between 9 percent and 11 percent from 7 percent to 9 percent.
“We hope to engage with the board of Cadbury on a constructive basis with the goal of consummating a recommended transaction,” Kraft’s Rosenfeld said in the statement.
Kraft’s lead adviser is Lazard. Centerview Partners, Citigroup Inc. and Deutsche Bank AG are also advising Kraft, with Citigroup and Deutsche Bank acting as corporate brokers. Cadbury is being advised by Goldman Sachs Group Inc., UBS AG and Morgan Stanley.
Bids like Kraft’s show “confidence in the corporate sector has risen off the floor,” said Lucy Macdonald, London-based chief investment officer of global equities at RCM UK Ltd., which oversees about $100 billion.
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