By Duane D. Stanford, Andrew Cleary and Zachary R. Mider
Jan. 18 (Bloomberg) -- Kraft Foods Inc., facing a deadline to make a revised bid for Cadbury Plc tomorrow, would have to use cash, rather than stock, for a higher offer to keep its own shareholders satisfied.
Billionaire investor William Ackman last week joined Warren Buffett, Kraft’s biggest shareholder, in saying Kraft risks diminishing the merits of a Cadbury takeover by issuing too much stock to pay for it. Kraft’s 11 billion-pound ($17.9 billion) cash-and-stock bid values the U.K. chocolate maker at 771 pence a share, below today’s highest price for Cadbury of 808 pence.
The deficit has left Kraft Chief Executive Officer Irene Rosenfeld trying to win over Cadbury investors without alienating her own shareholders. Earlier this month, Kraft said it would sell pizza brands including DiGiorno and Tombstone to Nestle SA and use proceeds from the $3.7 billion deal to boost the 300 pence cash component of its bid by another 60 pence.
“Any wiggle room you have has almost got to come from the cash side, not the stock side,” Donald Yacktman, founder of Yacktman Asset Management Co., which holds Kraft shares, said in a Jan. 15 telephone interview. “The issue has always been price. It’s not a matter of them being a terrible fit because I think they do fit.”
Cadbury shares rose as much as 14.5 pence to 808 pence in London, the highest price since Dec. 1. They were up 11 pence, or 1.4 percent, to 804.5 pence as of 12:16 p.m. local time.
A takeover of Uxbridge, England-based Cadbury would give Kraft, the maker of Toblerone chocolate and Tang powdered drinks, a faster-growing business and access to emerging markets, such as India. The combined company would have about $50 billion in annual sales.
Ackman’s Pershing Square Capital Management LP bought at least 32 million shares in Northfield, Illinois-based Kraft, or 2 percent of the company, and plans to purchase more. The stock is “extremely undervalued,” Ackman said Jan. 15. Pershing’s stake in Kraft is now the firm’s biggest holding.
“The more Kraft stock they issue, the less interesting this deal is,” Ackman said. “Fortunately, the seller also prefers cash.” The deal makes “tremendous sense,” Ackman added.
Rosenfeld announced the additional cash component on Jan. 5, the same day Buffett’s Berkshire Hathaway Inc. said it voted against a plan to issue millions of shares to finance a Cadbury takeover. The proposal, which shareholders will vote on next month, amounts to a “blank check” to modify the bid, Berkshire said.
Berkshire said it may support a Cadbury takeover if it concludes that the final offer “does not destroy value for Kraft shareholders.”
Kraft advanced 46 cents to $29.58 in New York Stock Exchange composite trading on Jan. 15. Based on that price, the hostile offer of 300 pence in cash and 0.2589 Kraft share is more than 60 percent stock. Cadbury shareholders have the option to substitute as much as 60 pence of shares with cash.
Kraft must raise its bid by at least 10 percent to 850 pence to stand a chance of capturing the maker of Dairy Milk chocolate bars, a survey of nine Cadbury shareholders shows. Together they account for about 11 percent of the shares. Responses ranged from 800 pence to 900 pence.
A bid at 850 pence “would not secure support from companies like ourselves,” David Cumming, head of U.K. equities at Standard Life Investments, said today.
“If Kraft want to get Cadbury they need to pay a full price to get long-term shareholders,” Cumming told the British Broadcasting Corp.’s Radio 4, according to an e-mailed transcript from Standard Life. “That price would have to be, in my view, above 9 pounds a share.” Standard Life said it holds less than 1 percent of Cadbury’s shares.
Jeffrey Scharf, president of Scharf Investments in Santa Cruz, California, said 900 pence a share would be “compelling,” while an offer in the “low 800s” may struggle. Scharf Investments has about 760,000 Cadbury shares.
“It’s more than a little ironic that Kraft sold its pizza business to Nestle for a higher multiple than they are willing to pay for Cadbury’s candy business,” Scharf said. “It’s not really a plausible, attractive offer.” Nestle said it paid 12.5 times earnings for the unit.
Cadbury Chairman Roger Carr has repeatedly called Kraft’s offer “derisory.” He said on Jan. 14 that Hershey Co. recently reaffirmed its interest in the company and would transform itself into a global business by trumping Kraft’s bid.
Hershey, the Pennsylvania-based chocolate maker that’s controlled by a charitable trust, was stepping up efforts last week to prepare a competing bid, people with knowledge of the matter said at the time. The company will make a decision on what to do after Kraft submits its final offer, the people said.
Kraft may be able to increase the cash portion of its offer without further negotiations with its lenders. In addition to a 5.5 billion-pound bridge loan it’s getting from Citigroup Inc., Deutsche Bank AG, and seven other banks, it has an agreement to borrow $3 billion, according to a Dec. 4 filing with the U.S. Securities and Exchange Commission.
Yacktman, the Kraft investor, said that he’s not opposed to a higher cash offer and thinks CEO Rosenfeld has left room to negotiate.
“As long as the economics are satisfied rather than the egos, then it’s a good deal,” Yacktman said.
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