As the end game for Cadbury nears, Irene Rosenfeld, Kraft’s chief executive, may soon be able to call checkmate.
Following a week of twists in the takeover battle, with Nestlé ruling itself out as a potential counter bidder and Warren Buffett, Kraft’s largest investor, urging the food group not to overpay, Ms Rosenfeld appears to be one move ahead on the chessboard.
“Clearly, the stakes have moved in Irene Rosenfeld’s favour,” says Simon Marshall-Lockyer, analyst at Jefferies International. “Nestlé was always the kingmaker in a possible joint bid with Hershey.”
The Swiss food group has said it will not make or even participate in a counter bid for Cadbury after acquiring Kraft’s US pizza business for $3.7bn. With Nestlé out of the game, Hershey will have a tougher time coming up with the cash for a counter offer.
Although the US confectionery group is still considering a counter bid, analysts believe the chances of one materialising are slim.
Martin Deboo, analyst at Investec, gives a 10 per cent probability to a counter bid from Hershey. He says the maker of Reese’s peanut butter cups and Hershey’s kisses cannot borrow enough to take on Cadbury alone and would struggle to get the help of Ferrero, the privately held Italian confectionery group, before the UK Takeover Panel-imposed deadline for competing bids. That is likely to be in the final week of January, while Cadbury investors have until February 2 to accept the Kraft bid.
Meanwhile, analysts say that Mr Buffett’s warnings are something of a red herring. He said that he would vote against the issue of 370m new Kraft shares to fund the deal. However, analysts point out that the credit markets have improved since early September, when Kraft went public with an unsolicited offer for Cadbury, making it easier for Kraft to raise additional debt should it need extra cash.
“The risk circumstances have changed dramatically,” argues Mr Marshall-Lockyer. “Warren Buffett is telling Irene Rosenfeld to go back to the banks and tell these people to put up some more risk.”
Kraft says it has the funds to buy Cadbury. Its bid initially comprised 40 per cent in cash and 60 per cent in shares.
Last week, under pressure from Cadbury investors wary of owning too much Kraft stock (the US group’s shares have sharply underperformed the Dow Jones Industrial Average over the past five years), Kraft sweetened the cash portion from 300p to 360p. But with Kraft’s offer now valuing Cadbury shares at about 768p, the cash element is still less than half of the total.
Analysts say Kraft could afford to lift the overall value of its bid to above 800p per Cadbury share and increase the cash portion to around 60 per cent to win over investors.
Cadbury investors rejected Kraft’s first offer, with 1.5 per cent tendering their shares ahead of an initial deadline on January 5, which Kraft extended.
Although investors have said publicly they want Kraft to come back with an offer of between 850p and 900p, analysts believe institutional investors, as well as Cadbury’s board, will consider offers above 800p.
Cadbury’s shares, which yesterday closed up 0.5p at 777p, had been trading close to 800p until Berkshire Hathaway, Mr Buffett’s investment vehicle, issued its warning on Tuesday.
The shares fell as expectations of a knock-out offer from Kraft faded. Meanwhile, Kraft’s shares, which closed at $27.43 in New York on Monday, rose to trade at $28.81 in New York yesterday afternoon.
Kraft has not ruled out a higher offer, but it must do so by a Takeover Panel deadline on January 19. The US food group is expected to wait for two financial updates from Cadbury, due next week, before making any changes to its offer.
On Tuesday, Cadbury will provide estimates of its 2009 sales and underlying profits for the 11 months ending in November, as well as December trading figures. It will also discuss its outlook for 2010. On Thursday, following the extension of a panel deadline, it will release more details on its 2009 performance.
Last week, Cadbury denied its board had approached Hershey to encourage a counter offer, claiming: “We are not looking for a white knight.”
Although Todd Stitzer, Cadbury’s chief executive, has suggested he would prefer a takeover by Hershey because of the two companies’ cultural similarities, Roger Carr, Cadbury’s chairman, has said the success of any offer would be determined on value.
Without a higher offer, Cadbury investors are likely to also reject Kraft’s sweetened bid, leaving the confectioner independent – at least until another suitor knocks on its door. But Ms Rosenfeld shows no signs of abandoning the game.
What lies ahead for Cadbury
Kraft buys Cadbury
A successful takeover by Kraft has become more likely after Nestlé’s withdrawal as a potential counter-bidder, because the Swiss group can no longer give Hershey financial help for a competing bid.
With Kraft’s bid the only offer on the table, the US food group has now only to come up with the right price.
Analysts say Kraft needs to come up with more than 800p a share and possibly more cash to get the support of Cadbury’s board. Although it has not ruled out a higher offer, and has more cash available after selling its US pizza business to Nestlé last week, it hasn’t yet delivered a knock-out bid.
However, Kraft’s position has been complicated by the intervention of Warren Buffett, who owns a 9.4 per cent stake in the company. He has said he may vote against the issue of 370m shares to fund the deal
Cadbury stays independent
Cadbury still has a chance of remaining independent because Kraft may not be willing to pay the price investors want. Some shareholders say that they are holding out for a bid of more than 900p a share.
Cadbury’s defence strategy to date has been to stress its value as a stand-alone company.
It has been supported in its task by trade unions and Midlands MPs, who have voiced opposition to the Kraft offer.
Although it has not publicly sought a white knight – and has claimed it is not looking for one – chief executive Todd Stitzer has pointed out the cultural similarities between Hershey and Cadbury, suggesting that he would like to see a counter-offer emerge.
Analysts believe that Cadbury’s stand-alone value is about 750p a share, slightly less than the market value of Kraft’s current offer
Hershey buys Cadbury
Hershey has sound reasons for wanting to buy Cadbury. The two companies operate in different parts of the world, with Hershey strong in the US and Cadbury strong in Europe and some emerging markets.
However, it faces formidable obstacles. It has less firepower to buy Cadbury than Kraft does because it is a much smaller company, with a market capitalisation of some $8.31bn compared with Kraft’s $42.6bn.
It is also run by a charitable trust that would be heavily diluted if a large share issue were required for a deal and could lose control of the company.
Analysts say that Hershey would have to take on “prohibitive” levels of debt and leverage up to 5.4 times earnings before interest, tax, depreciation and amortisation, or to look for equity investors to buy Cadbury
Hershey/Ferrero buys Cadbury
Hershey could team up with privately held Ferrero to buy Cadbury.
Although Ferrero is the market leader in Germany, Spain, Italy and France, it has only a tiny market share in the UK and would like to pick up some of Cadbury’s brands. In the past, Cadbury has also expressed interest in buying Ferrero if it could convince the family run company to sell.
The Italian confectioner and maker of Ferrero Rocher chocolates, Kinder Eggs and Nutella chocolate spread has annual net sales of €6bn, but has never been involved in a major M&A transaction.
Although it has held talks with Hershey about a Cadbury bid, and owner Michele Ferrero is believed to be Italy’s richest man with a personal wealth of €9.5bn, he is publicity shy and appears reluctant to get involved in a messy takeover battle.
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