Rob Cox, Breakingviews.com Published: Monday, November 09, 2009
Kraft would like to start an insurrection among Cadbury shareholders. The U.S. food group wants the British confectioner's owners to nudge management into discussions over its £10-billion (US$16-billion) takeover bid. But to tip the balance decidedly in favour of its unsolicited -- and now formal -- approach it needs something else: more money.
The good news for Cadbury shareholders is that Kraft's decision to make its offer official on Monday suggests there's more money to be had. After all, Kraft chief executive Irene Rosenfeld would not have convinced her board to enter a formal UK takeover process -- including signing expensive commitment letters from nine banks -- if she weren't prepared to do more to win her quarry.
It may seem surprising that Kraft did not pitch something sweeter than its original proposal in its new hostile approach. After all, the company has had more than two months to test the waters. The original, informal offer valued Cadbury at 745p, a price that Cadbury shares quickly surpassed. The subsequent decline in Kraft's stock makes the consideration -- 300p in cash and the remainder in equity -- worth about 712p today -- less than before, as Cadbury was quick to point out.
Yet there's still time for Rosenfeld to up the price -- as investors appear to expect, with Cadbury's shares closing 7% above the bid price on Monday. Under UK takeover code rules, Kraft can still raise its offer. Doing so right away, in the absence of any obvious competition for Cadbury from Nestlé, Unilever or Hershey, would have amounted to negotiating against itself. That said, amending the terms to at least meet the value of the original offer tabled on Labor Day might have made Kraft appear less cheap.
Rosenfeld, though, faces a challenge in balancing her desire for growth with concerns among shareholders like Warren Buffett about overpaying. Kraft's most recent set of results showed a low-growth conglomerate in need of a sugar fix. Yet absent greater synergies from a Cadbury deal, Kraft can't raise its bid by much without destroying value or losing its investment-grade debt rating.
What it can do, however, is begin a war of attrition. Even a low-ball bid forces Cadbury shareholders to consider what it would take for them to sell. It also brings hot money into the mix in the form of merger arbitrageurs. Their concern is less whether Cadbury is worth 800p or 900p than whether it can be sold for a premium to what they paid.
Kraft has sounded the trumpet with its formal bid. It will take more than battle cries, however, to bring victory.
Share Investor Blog - Stockmarket & Business commentary
Share Investor New Zealand Business News- Get more business news
Discuss this topic @ Share Investor Forum
Share Investor's Daily Forex Updates
Recommended Amazon Reading
 | Warren Buffett and the Interpretation of Financial Statements: The Search for the Company with a Durable Competitive Advantage by Mary Buffett Buy new: $16.47 / Used from: $13.50 Usually ships in 24 hours |
 | Warren Buffett Speaks: Wit and Wisdom from the World's Greatest Investor by Janet Lowe Buy new: $13.57 / Used from: $4.2 |
Kindle 2/Kindle DX: Amazon's New Wireless Reading Devices (Latest Generation)
0 comments:
Post a Comment