GOOD MORNING. stocks in Asia closed mixed today; U.S. futures are pointing to a lower open.
By any stretch, $19.6 billion should buy you a lot of Dairy Milk chocolate and Trident gum. But now that Kraft Foods (KFT: 29.58, +0.46, +1.57%) has struck a deal for Cadbury (CBY: 51.90, +0.06, +0.11%)—creating the world’s largest confectioner–will it pay off for shareholders?
Cadbury’s board accepted a deal for the company at 850 pence (including a special 10 pence dividend) or roughly $19.6 billion, 50% above Cadbury’s share price before Kraft’s initial offer in early September. The higher bid includes 500 pence per share in cash, up from 300 pence, and the rest in Kraft shares. Large Kraft shareholders such as Warren Buffett had opposed giving Kraft a blank check to issue millions of shares to fund the deal, a move that could have sharply diluted earnings. Kraft plans to issue 265 million new shares to fund the deal, compared with its original plan to issue 370 million. But Kraft said the deal would add around 5 cents to earnings in 2011, providing a percentage return on the deal in the mid-teens. The higher cash component appears to have swayed Cadbury’s board. Question now: whether Kraft shareholders will see a higher long-term share price too.
Cadbury’s profit growth certainly looks attractive. Operating profit margins have been rising, thanks in good measure to its highly lucrative gum business, and should hit 14.7% this year, up from 13.5% in 2009, estimates Jefferies analyst Simon Marshall-Lockyer. Organic revenue growth should hit 6.5% this year, up from 4.8% in 2009, he notes, and sales are growing more rapidly in emerging markets, which account for 38% of Cadbury’s global sales, versus 20% for Kraft. Chocolate and gum also tend to generate higher margins than staple grocery items, Kraft’s main business. And Cadbury’s revenues have been growing steadily in North America—up 13% in the fourth quarter—while Kraft’s sales are expanding at a fraction of that pace. Kraft is paying 13 times Cadbury’s underlying 2009 profits—not cheap, analysts say, but not excessively rich either.
Of course, the history of big “transformational” deals is littered with failures, and integrating the supply chains, manufacturing plants and global operations of such large firms will be no easy feat. Kraft has been trying to decentralize operations, while Cadbury has been streamlining its business units—both aimed at improving profitability. “We have great respect for Cadbury’s brands, heritage and people,” said Kraft CEO Irene Rosenfeld in a statement. The challenge now: coming up with a joint recipe for success.
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