Published September 17, 2009 at 3:14 PM
It appears that there's a delicious deal brewing, and there's no doubt that it will have ties to Warren Buffett. The Wall Street Journal is reporting that the Hershey Trust Co., which holds voting control of candy maker Hershey Co. (NYSE:HSY), has hired Warren Buffett's favorite banker, former Goldman, Sachs & Co. (NYSE:GS) banker Byron Trott, and boutique banking firm Watch Hill Partners LLC to advise on a possible bid for Cadbury plc (NYSE:CBY). There were earlier reports that Hershey had hired J.P. Morgan Chase & Co. (NYSE:JPM) to explore options as well.
If Hershey makes an offer, it would have to outdo an offer of $16.7 billion from Kraft Foods Inc. (NYSE:KFT), of which Warren Buffett is the largest shareholder. Buffett has been mum on the subject of Kraft's rejected bid until Wednesday when he told CNBC that the offer Kraft made was a "pretty full price" and that Cadbury has "the disadvantage of using an undervalued stock," according to Bloomberg.
Most shareholders and analysts agree that Cadbury's price is worth more than the 13-times Ebitda Kraft put on the table due to the Mars Inc.-Wm. Wrigley Jr Co. deal that was financed by Buffett. Shareholder Gamco Investors Inc.'s Mario Gabeilli told Bloomberg that he believes Cadbury's stock is worth 10% to 15% more. Of course, it will be the opinion of Nelson Peltz of Trian Fund Management, who is the largest shareholder in Cadbury, that will matter the most as far as valuation is concerned.
Is it possible for Hershey to bid that much? As we reported earlier, it would be more likely that Cadbury would bid for Hershey. Cadbury has a market cap of $17.7 billion and Hershey a market cap of $9 billion. Hershey also has $1.7 billion in net debt. Jeremy Fialko, an analyst with Redburn Partners in London, told Forbes,"Cadbury could buy Hershey by raising more debt, but it would be an enormous share deal." That also means that it's not likely that Hershey could afford to outbid Kraft for Cadbury without help from either private equity or a mighty lot of financing. Plus, it would have to take something or someone pretty influential for the Hershey Trust to even consider doing a deal that might dilute its stock. Especially since it's etched into Pennsylvania law that the trust must maintain control of Hershey.
So if Hershey is really talking about acquiring Cadbury, then Hershey is probably talking to Buffett about financing the deal like he did Mars/Wrigley. After all, Buffett has a sweet tooth for investment in candy and food companies, such as See's Candies and Coca Cola Co. (NYSE:KO). Just because Buffett says Kraft has made its best offer doesn't mean he is keeping his hand out of the sugar bowl. - Maria Woehr
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