A bruising battle for control of the iconic confectionery group appears likely and could break out within days.
Kraft, the huge US food group that makes food products ranging from Velveeta cheese to Oreo biscuits, weighs in as the favourite to walk away with the spoils. Nestlé, the Swiss food conglomerate, is understood to be considering an offer, and has the financial clout to take on Kraft. Hershey, the Pennsylvania-based chocolate bar maker, is also a contender, but would need to form an alliance with another company – possibly with Ferrero of Italy – because it is too small to take over Cadbury on its own.
Analyst Andrew Wood at brokers Sanford Bernstein said yesterday that Kraft is in the driving seat.
“Kraft is still the favourite to get the deal done ... but not at the ‘steal’ it had originally hoped,” said the top-rated analyst in a research note, which said the right price for Cadbury is 900p per share.
Wood said he believes a Hershey/Ferrero bid would fall short but should force Kraft to pay a higher price, while Nestle’s interest would only be on the coat-tails of a Hershey bid to try to get back its KitKat brand in the United States. Kraft has had no direct contact with Cadbury management since an initial discussion between their US group chief executive Irene Rosenfeld and Cadbury chairman Roger Carr on August 28.
Rosenfeld followed up that meeting with a letter detailing an offer, which Cadbury’s board discussed before formally rejecting it a few days later as undervaluing the company and “derisory”.
Kraft’s initial offer in early September was 300p in cash and 0.2589 new Kraft shares for each Cadbury share and originally worth £10.2bn. However, by the time the US company formalised it on November 9, on identical terms, a subsequent fall in Kraft shares and a weakened dollar meant the value of the bid had fallen to £9.8bn.
Cadbury investors are standing on the sidelines, smacking their lips at the prospect of a takeover. Talk of a bidding war pushed shares of the company to their highest level in at least five years early last week. The company’s stocks closed down 1p at 805p in yesterday’s dealing in London.
Cadbury is the chess piece that could determine who leads the world’s confectionery market, depending on whose hands the company ends up in, according to a report from AdAge.
If Cadbury lands in the portfolio of Kraft, it would topple Mars from its perch as the globe’s leading confectioner, a status Mars assumed after winning control of Wrigley last year. But with Ferrero and Hershey teaming up to acquire Cadbury, that trio would dwarf Mars even more than a Kraft/Cadbury combination.
According to Euromonitor, Mars had 14.5% of the $167bn confectionery market in 2008 and Kraft/Cadbury would eclipse that with a combined 15% share. A Cadbury/Ferrero/Hershey match-up, however, would trump them all, yielding a player with 19.3% of the world’s confectionery market, Euromonitor figures show, according to the AdAge report.
Of course, it is far from clear how – and even whether – a Hershey/Ferrero collaboration to take over Cadbury would work, and which Cadbury brands would go to each partner. It’s also unclear what such a combination would mean for marketing.
Kraft is a big-time marketer and an accessible public company, the report states. Hershey is also public, but controlled by a family trust while Ferrero is a closely held Italian company that’s long avoided media scrutiny.
A bid for Cadbury would test Hershey financially. With annual sales of about $5.2bn and a market cap of $8.5bn, Hershey is about half the size of Cadbury, which has a market cap of more than $18bn. Hershey is dwarfed by Kraft, which has annual sales and a market cap north of $40bn. Kraft has already raised more than $9bn to fund its offer.
Hershey has received signals from two banks, JP Morgan Chase and Bank of America Merrill Lynch, that at least $10bn in cash could be raised. The rest would come from other sources such as wealthy individuals, new shares and the trust’s own assets.
Currently, about 85% of Hershey’s sales are tied to the slow-growing US sweets market. Buying Cadbury would give Hershey access to fast-growing markets outside the United States such as India and Mexico. An acquisition could also saddle the combined company with a huge debt load that could result in Hershey’s investment ratings being downgraded to junk status.
Speculation over which company will capture Cadbury has reached fever pitch in the City.
Jeremy Batstone-Carr of brokers Charles Stanley said: “What we know is that a number of significant investors have been building stakes in Cadbury over the past two weeks. The Cadbury share price remains comfortably above the level of Kraft’s hostile offer which currently values the UK-based confectioner at 724p per share. This clearly implies that the market views the chances of either a rival suitor or a higher offer from Kraft as being highly likely.
“Rumours of other interested parties are inevitable and are based largely on the fact that Cadbury is about one and a half times bigger than Hershey in terms of both sales and operating profit and two times larger in terms of market capitalisation. Acquiring Cadbury would be an impossible task for Hershey alone but might be more manageable in the context of other interested parties.”
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