Cadbury shares have dropped 11p to 766p, the biggest faller in the leading index, as analysts questioned the prospects of a knock-out bid from predator Kraft after the US company reported disappointing results.
Kraft has until 9 November to come up with a firm offer after its initial cash and share proposal - now worth around 717p a share - was rejected by Cadbury. Optimists had been hoping Kraft would up the ante to 850p-900p. But after the US group cut its forecast for full year sales growth last night, there is a growing belief it may stick to the original terms and go hostile with the bid. However it has raised $9bn of bridging finance which would allow it to increase the cash component of the offer at a later stage if necessary.
Analysts pointed to some cautious comments from Kraft chief executive Irene Rosenfeld in the conference call following the figures. The company said it would take a "disciplined" approach to the offer, based on accretion to earnings per share in year two; return on investment well in excess of the cost of capital; and maintaining an investment grade credit rating and its dividend. Martin Deboo at Investec said:
Kraft's comments on the proposed Cadbury combination lead us to reduce our target price materially, from 840p to 785p. We now think Kraft will be willing to pay only 800p, and the probability of a successful bid falls accordingly.
Our interpretation of Rosenfeld's comments on the call was that 'disciplined' means precisely what it says and that Kraft will not put corporate pride before shareholder value. We think comments by major Kraft shareholder (and presumably a key opinion former) Warren Buffett in September that Kraft should not overpay add weight to this interpretation.
And analysts at JP Morgan said:
We now assume a lower price on lack of competing bids, lower synergy assumptions, and our growing belief Kraft could walk away (and come back only a year later when investors would have a better sense of [Cadbury's] Vision into Action's true potential).
We doubt Kraft will go over 780p. Such an offer with only a 30% stock component may be enough.
However Panmure Gordon was more convinced Kraft could offer more:
Apart from the usual bluster from Kraft about not over-paying, the only real new news was that Kraft has raised $9bn of bridge financing, which is enough to raise the cash element of the bid from 300p to 400p as we have previously suggested.
It is fair to say there is little point in it bidding aggressively against itself, until it is clear whether any other bidders will emerge. We believe Kraft and Cadbury are still far apart on valuation, so the offer when it comes will be hostile. Kraft can always increase its offer at a later date, but Kraft needs to be careful not to alienate Cadbury shareholders with an excessive low opening offer. The current terms are worth 732p a share (before the expected fall in Kraft's shares today), which equates to 19.6 times PE and 17.2 times PE for 2009 and 2010 respectively. This is barely a premium to the global food sector, and we feel would quite rightly be rejected by Cadbury shareholders. We continue to see downside if a deal does not go through of 700p, far higher than some suggestions that Cadbury would fall back to 600p.
And Cazenove commented:
We continue to expect Kraft to put forward a firm offer for Cadbury before the 9 November put up or shut up deadline. We maintain our fair value range of 788p-873p and anticipate a greater proportion of cash in the part-cash and part-Kraft shares structure of the proposal (previously 40% debt and 60% equity-financed). We continue to believe speculation well above the top-end of this range is very optimistic in the absence of any counter-bid.
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