Cadbury has again rejected Kraft's hostile £10.5bn bid for the company, but left the door open for a "sensible" offer.
In its final defence document Cadbury said it had an outstanding 2009, with sales up 5% and a higher than expected operating margin of 13.5%. It said its dividend would rise by 10%. The usual "derisory offer" and "don't let Kraft steal your company" comments were also present and correct.
On a conference call Cadbury chief executive Todd Stitzer said:
People set strategy, and people get results. The fundamental decision for shareholders is which team of people can deliver what they say they will do.
And chairman Roger Carr described Kraft's board as a management team with "a track record of over-promising and under-delivering".
Kraft's offer includes a mixture of cash and shares - the former set to be boosted by the proceeds of a recent sale of Kraft's pizza business - but there have been rumblings from the likes of Warren Buffett, a Kraft investor, about not overpaying.
Kraft's offer currently values Cadbury at around 762p a share, compared to the current price of 780.5p, down 0.5p. Analysts reckon any successful bid needs to start with an 8. Investors are also waiting for the next move from Ferrero, the Italian chocolate maker which could make its own offer, perhaps in tandem with US group Hershey. Nestle has already ruled itself out. Analyst Graham Jones at Panmure Gordon said:
Cadbury's 2009 results show 5% LFL sales growth and margins up by 160 basis points to 13.5%, slightly ahead of previous guidance. Cadbury states that it has 'excellent momentum going into 2010', although has been unable to give any margin guidance for 2010, merely repeating its objective of 16-18% margins by 2013.
Kraft's offer values Cadbury at 12 times EBITDA for 2009, significantly below comparable transactions which have ranged from 14.3 times to 18.5 times EBITDA. This implies a value of 900p+, although given the amount of risk-arbitrage ownership, we suspect that an increased offer in the range of 825p-850p could well be sufficient to clinch the deal. Given Kraft's cash proceeds from its pizza sale, we believe it can afford to raise the cash element in order to raise the offer to within this range, at the same time as offering less shares than initially planned and therefore appeasing Warren Buffet.
Martin Deboo at Investec said:
The beat will not be unhelpful to Cadbury's cause, but the numbers reflect a slowing of both sales and margin progression in the fourth quarter. Meanwhile we concur with Cadbury's observations on the inadequacy of Kraft's current offer.
Our view in the round is that today's disclosures are neutral to positive for Cadbury's valuation and we re-state our target price of 795p and advice to shareholders to sit on the shares. We continue to think that Kraft will need to come up with an offer north of £8 and with a significantly enhanced cash component to take out Cadbury. We think this is less than certain and our target price is based on a weighted average of the potential outcomes.
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