An initial offer valuing Cadbury at around £10.2bn ($16.7bn) was rejected unequivocally by Cadbury, prompting Kraft to go public with the bid in order to “encourage and further” the process. Shares of Cadbury soared 35 per cent at the start of London trading on the news.
Kraft is proposing £3, or $4.92, in cash and 0.2589 new Kraft shares per Cadbury share, valuing each Cadbury share at £7.45, representing a premium of 31 per cent from the Cadbury’s closing price Friday of £5.68.
Cadbury vulnerable
Kraft has been touted as a possible buyer for Cadbury ever since it demerged its US soft drinks business in May last year, leaving it vulnerable to a takeover. A month earlier, Cadbury lost its status as global confectionery leader after Mars paid $23bn for Wrigley's global business.
A combined Kraft and Cadbury would significantly expand the global reach of both businesses and create synergies worth in the region of $625m, according to Kraft chairman and chief executive Irene Rosenfeld. $300m would be accrued in operational savings with $200m coming from administrative costs and $125m from marketing and selling.
“Increasingly we’re seeing consolidation in the confectionery industry and it’s one reason why I feel the combination of these two companies is a compelling proposition,” Rosenfeld said in a conference call with analysts. She added she believed a standalone Cadbury “has limited opportunities for value creation”.
Attractive synergies
A Cadbury merger would allow Kraft to gain a footing in the fast growing chewing gum category, where Cadbury owns market leading brands including Trident and Halls. Kraft would also benefit from Cadbury’s broad geographical reach, in particular its strong position in the developing Indian and Mexican markets. For its part, Cadbury would profit from Kraft’s extensive distribution network in Russia, China and Brazil, according to Rosenfeld.
Kraft has also vowed to save workers jobs at Cadbury’s UK factory in Somerdale, Bristol which is due to close as Cadbury shifts production to Poland.
Any deal between Kraft and Cadbury would require the approval of both sets of shareholders. Kraft is now likely to come back with an improved offer or launch a hostile bid for Cadbury. The other possibility is a counter bid by either Nestle or Hershey or a combination of the two.
Undervalued?
Some analysts believe Kraft’s initial offer undervalues Cadbury. “We think 15-16 times EBITDA is a reasonable multiple,” said Bernstein analyst Andrew Wood. “Mars paid 19.5 times EBITDA for Wrigley in May 2008, and arguably Cadbury has much more profit growth potential than Wrigley had at that time.” A 15 times 2008 EBITDA figure values Cadbury at £8.55 per share.