It would have been astonishing if Kraft Foods’ hostile bid for Cadbury had gone to the bitter end. Like most contested takeover battles, this one looks to be edging toward a last-minute rapprochement. Cadbury will most likely squeeze more out of Kraft without an auction — an impressive feat.
Kraft is expected to pay about 840 pence ($13.70) in cash and stock, and let Cadbury shareholders keep a final dividend worth 12 pence a share. That takes Kraft’s offer to about 850 pence ($13.86). Kraft is also expected to raise the cash component to around 500 pence, more than half the consideration.
That would be a 50 percent premium to Cadbury’s pre-bid share price, but it’s not hard for Kraft to justify. The market rise during the course of the battle accounts for 12 percent. Upgrades to sleepy analysts’ estimates provide perhaps another 10 percent, implying a reasonable 28 percent premium for control.
Alternatively, put Cadbury’s forward earnings on a multiple of 15.5 times — a justifiable premium to the market given Cadbury’s double-digit compound earnings growth ahead — and it’s worth 682 pence on its own. With Cadbury’s help, Kraft should be able to lift the cost savings to 7.5 percent of Cadbury’s annual £6 billion in sales. That would imply synergies with a present value of more than £3 billion. On this math, Kraft might have justified a bid close to 900 pence a share.
The re-jiggering of the cash and shares mix means Kraft can lower the amount of stock it puts into the offer, pleasing a big shareholder, Warren E. Buffett. As for Cadbury, it has delivered value for shareholders in an increasingly vulnerable situation.
With hedge funds holding 20 percent and many American investors happy to take Kraft paper, Cadbury’s independence was threatened. Cadbury flirted with a bid from Hershey, which surely helped scare Irene Rosenfeld, Kraft’s chief executive, into raising her offer. Peter Mandelson, the British politician who appealed to shareholders not to sell on the cheap, also lent a hand.
It looks as if Ms. Rosenfeld will get her deal. At some points during the battle it looked as if the Cadbury endeavor might sink her career. Now, as long as she can hold to her promises, she will look like the conquering hero of Candyland.
Funds Lose Allure
Giant private equity funds won’t be back for a while. New research shows many investors have lost interest in multibillion-dollar funds. That will make it tougher for big buyout shops like Blackstone and Kohlberg Kravis Roberts to raise money in the amounts they have become accustomed to. Some may even have to relearn smaller-scale methods of investing.
The best-regarded firms can still raise plenty of money. BC Partners, a private equity fund based in Europe, is aiming to start a 6 billion euro fund. And Blackstone has gathered about $9 billion for its next fund.
But firms may not be able to harvest as much money as they have in the past. Even if Blackstone’s total rises further, it will probably raise only about half the $21.7 billion that the firm raised in 2007 for a fund.
Most big buyout firms will have to set their sights lower still. According to a recent survey by the data provider Preqin, 37 percent of buyout investors who had previously invested in large funds said that they would now avoid funds with more than $4.5 billion. Just 5 percent of investors said they would avoid small and midmarket funds.
Investors are shying away from giant funds partly because, with less accommodating debt markets, the big deals these funds need are tough to pull off. For some of the same reasons, private equity managers are having trouble exiting larger investments profitably. Partly as a result, large funds are posting lower returns than midmarket funds, according to Preqin. That gives investors another reason to look elsewhere.
Even if they can still raise billions, most private equity firms will have to revert to preboom types of deals. Rather than undertaking giant leveraged buyouts of public companies, the more typical investment used to be buying smaller private businesses and units from public companies.
Going back to that kind of business may require more work by the buyout barons for deals with smaller fees and potential rewards. That means that as their funds shrink, big firms could find their profits — and payouts to their people — deflating, too.
For more independent financial commentary and analysis, visit www.breakingviews.com.
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