By Michael Corkery
Investors in London and New York are handicapping the Cadbury takeover drama as the dust settles from this morning’s whirlwind of news.
The short of it: Kraft Foods has improved its chances of acquiring Cadbury, but only at the right price.
Cadbury shares are down nearly 4%, to 770 pence on the London Stock Exchange, as investors digest news that one possible white horse bidder–Nestle–is out of the running and Kraft’s largest shareholder, Warren Buffett’s Berkshire Hathaway, is opposed to Kraft issuing new shares for an acquisition.
In a statement, Buffett says he isn’t against a deal, but he isn’t willing to give Kraft the ability to overpay for Cadbury by issuing 370 million new shares.
The result: Kraft’s shares rose 3% on the New York Stock Exchange this morning, as Buffett’s statement eased concerns that existing Kraft shareholders would be diluted from the large share issuance and that Kraft would overpay for Cadbury –a concern that has weighed on Kraft’s share price since the takeover battle began late this summer.
Buffett’s move could have the double-barrel effect of making a deal more palatable to Kraft shareholders and to Cadbury shareholders. Kraft’s current offer is a mix of cash and stock. The more Kraft shares rises, the more valuable its bid becomes. Kraft also this morning pumped more cash into its offer, making it a 50-50 stock-cash mix up from 60-40 stock and cash).
While Kraft sweetened its bid today by tweaking the cash-and-share mix, it hasn’t raised the price from its original 740 pence-a-share offer, which explains the fall in Cadbury shares. They had been trading above 800 pence for several months in anticipation of a higher bid from Kraft or another company.
As for Nestle’s exit, it “reduces the likelihood of a successful counterbid scenario” writes Jefferies & Co. analyst Simon Marshall-Lockyear in a research note. He said the most likely counterbid to Kraft’s offer would come from Nestle teaming up with Hershey.
With Nestle out and a lone Hershey bid seeming more unlikely, Marshall-Lockyear downgraded Cadbury to hold from “buy” and reduced his expectation for a deal price to 810 pence from 945 pence.
Kraft may yet bump up its bid, but the Kraft management and Buffett, continue to play this chess game cautiously. This morning’s moves by Kraft could be the check before the checkmate.Share Investor Links
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