With the battle for Cadbury PLC all but complete, score a victory for Kraft Foods Inc. and hard-charging Chief Executive Irene Rosenfeld: She’s poised to pick up a candy industry crown jewel for a price that didn’t rattle Wall Street.
But score a victory, too, for Cadbury’s management, which, after months of effectively dismissing Rosenfeld as a low-rent piker, managed to extract nearly $3 billion more from Kraft than its first offer.
The challenge now for Kraft will be to make the enormous deal pay off, including being able to meld a proudly British company with Kraft, which Cadbury’s management once derided as a low-growth conglomerate.
Kraft announced Tuesday that Cadbury had accepted its buyout offer of $19.5 billion, considerably above the $16.7 billion Kraft first bid in September. The deal would create the world’s largest confectionary business.
And if the deal goes off without any major integration hitches — always a possibility in such a large combination — it should help Rosenfeld deliver on her long-term promises to boost Kraft’s sales and profit growth.
Kraft, facing a Tuesday deadline to up its bid or hold steady, did the former, turning a hostile pursuit into a friendly deal. Kraft still has two weeks to persuade a majority of Cadbury shareholders to accept the deal. And, under British law, the door remains open until Monday morning for the Hershey Co. to jump in with a rival bid.
Hershey couldn’t be reached for comment.
But an offer from Hershey at this point isn’t expected, nor is a rejection by Cadbury shareholders, analysts said. “A bidding war for Cadbury is highly unlikely given the backing of the (Cadbury) board” for Kraft’s offer, said Erin Swanson, a stock analyst at Morningstar Inc.
Topping Kraft’s bid would be “very challenging” for Hershey, a considerably smaller company than Kraft, Swanson said. “We expect the saga to finally come to a close.”
Kraft isn’t necessarily getting Cadbury on the cheap, experts said. But the price it’s paying is within a range that many Wall Street analysts expected. “In our opinion, Kraft is paying a fair price for a very attractive asset,” Swanson said.
Rosenfeld, in a conference call with stock analysts, said Kraft had maintained its “financial discipline” and that both its dividend and credit rating would remain intact. Indeed, Moody’s Investors Service on Tuesday said Kraft will likely retain its investment-grade credit rating, despite taking on debt to help fund the deal.
As for Cadbury, the $19.5 billion is somewhat less than what some analysts believed it is worth, but 50 percent more than Cadbury’s market value before Kraft went public with its buyout bid in September.
“What Cadbury did was fantastic — they pulled another $2 1/2 billion out of Kraft’s pockets,” said Thomas Lys, a professor and acquisitions expert at Northwestern University’s Kellogg School of Management.
Kraft, with $42 billion in annual revenue, is a collection of brands and foods from Oscar Mayer meats and Oreos to chocolate candy in Europe. Cadbury, with about $8 billion in revenue, is a worldwide leader in chocolate and is known best in the United States for its Dentyne and Trident chewing gum.
“The two companies are highly complementary,” Rosenfeld said.
The combined companies would be the world leader in chocolate and sweets, Kraft said, and No. 2 globally in the high-growth gum market, behind Mars’ Wrigley operations. For Kraft, the deal should help boost its sales and profit growth rates, and greatly bolster its presence in international markets.
Rosenfeld told analysts Tuesday that the biggest opportunity presented by the deal is to “fill in geographic white spaces.” For instance, with Cadbury’s strong presence in India and Mexico, Kraft will have better opportunities to distribute its products there.
“From a strategic perspective (the deal) makes a ton of sense,” said Morningstar’s Swanson.
Matt Arnold, a stock analyst at Edward Jones, agreed, “If it’s integrated right.”
Many big corporate mergers have eventually foundered on integration issues. If integrating a buyout target takes longer than expected, anticipated cost savings dissolve. Kraft predicted pretax cost savings of at least $675 million a year once the combination has been working for three years, which will likely entail job cuts.
And then there’s the issue of melding together disparate corporate cultures, a task that won’t be made any easier by Cadbury management’s public dismissals of Kraft’s business model and management, Swanson said. “They’ve bashed Irene and Kraft for months.”
With its new bid this week, Kraft sought to appease not only Cadbury shareholders, but its own stockholders, reducing the amount of new shares it will issue to fund the deal.
Kraft had planned to issue up to 370 million new shares of stock, which would have required shareholder approval. Earlier this month, Kraft’s largest shareholder, billionaire Warren Buffett, said he’d likely vote “no” to that proposal, fearing Kraft might overpay for Cadbury.
But with the new deal, Kraft is paying more cash, so the amount of stock it would be issuing would fall below the amount needed to conduct a vote by its shareholders. Buffett didn’t release a public comment Tuesday on the deal.
Kraft’s stock slipped 17 cents, or 0.6 percent, to $29.41 on Tuesday.
The Associated Press contributed to this report.
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