Kraft launches surprise $18-billion bid for Cadbury

Kraft Foods (KFT-N) said it was intent on pursuing Britain's Cadbury (CBY-N) , which soared in value after it snubbed a premium-rich bid from the U.S. group, reinforcing hopes of a broader-based pick-up in merger activity.

Analysts said North America's biggest food group might have to raise its £10.2-billion ($17.98-billion Canadian) offer by up to 40 per cent after shares in the world's No. 2 candy and chocolate maker increased by almost half on news of the approach.

Cadbury's stock closed up 38 per cent at 783 pence, having peaked close to its all-time high at 808 and well ahead of Kraft's 745 pence-per-share pitch.

The price spike reflected analysts' views the combination would be a success, chances of a counterbid and bankers' hopes that rallying equity markets and a brighter economic outlook were encouraging companies to view mergers and acquisitions (M&A) prospects with greater confidence.

“If the deal gets done, it sends a positive signal about the M&A market. There is not that much more consolidation to be done in confectionery, but a successful outcome would make global consumer companies more likely to pursue their own M&A targets,” said a senior banking source.

The two firms' product portfolios are largely complementary. Top brands at Cadbury, which had sales of £5.4-billion last year, include Bassett's Liquorice Allsorts, Maynards Wine Gums and trademark chocolate bars while Kraft, which had turnover of $42-billion, is known for Maxwell House coffee, Oreo cookies and Ritz crackers.

Kraft's cash-and-shares offer, outlined in a letter on Aug. 28, represented a 31-per-cent premium to Cadbury's closing share price from last Friday.

“Our initial view is that this represents a competitively pitched offer, but something less than a knockout blow,” said Investec analyst Martin Deboo.

“For a useful comparison, we think that investors need to look as far back as Nestle's acquisition of Rowntree in 1988, where we recall that the exit premium was in excess of 100 per cent of Rowntree's pre-speculation share price.”

Panmure Gordon & Co recommended investors hold out for at least 800 pence a share and Bernstein Research suggested between 855 and 1,070.

One top 20 Cadbury investor who declined to be named said benchmarks set by other deals indicated Kraft would need to offer at least 10 per cent more, “and you could be looking at 20 to 30 per cent higher.”

Kraft offered 300 pence in cash and 0.2589 new Kraft shares per Cadbury share in the hope it can create a “global powerhouse in snacks, confectionery and quick meals”.

Evolution Securities, which sees fair value for Cadbury in any takeover of at least 1,000 pence a share, said a tie-up would put the group neck-and-neck with Mars-Wrigley, with each boasting about 15 per cent of the global confectionery market.

It would still be half the size of Nestle which reported revenues last year of 109.9-billion Swiss francs ($111.7-billion Canadian).

Consolidation hopes helped drive shares in the food and drink sector as a whole up 2.35 per cent, outperforming a 1.3 per cent rise for European blue-chips.

Cazenove analysts said Nestle might make a counterbid for Cadbury, perhaps in a joint approach with U.S. chocolate group Hershey Co (HSY-N) . Nestle CEO Paul Bulcke declined to comment directly but said the company had no major acquisitions planned though was always open to opportunities.

Cadbury said it believed Kraft's approach fundamentally undervalued the British company.

Northfield, Illinois headquartered Kraft said it was not ready to throw in the towel, however, describing itself as “committed to working toward a recommended transaction and to maintaining a constructive dialogue.”

“We think (a deal) makes perfect sense ... subject to the right price for both parties,” Bernstein analysts wrote.

A debt market source said Kraft was most likely to finance a bid with a bridge loan via the bond markets. “We've seen sizeable acquisitions this year for Merck and Pfizer done this way,” the banker said.

Global merger and acquisition activity fell 44.5 per cent to $872.5-billion in the first half of 2009, according to Reuters data – the lowest first half volume since 2003 and the steepest decline since 2001. Lazard is acting as lead financial adviser to Kraft with Centerview Partners, Citigroup and Deutsche Bank also advising.


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