19 January 2010
Kraft has announced detailed terms of a final offer for Cadbury, which crucially carry the unanimous endorsement of the Cadbury Board of Directors, and its influential chairman, Roger Carr.
This transaction values Cadbury’s share capital at £11.9bn, or 840p/share, consisting of 500p in cash and 0.1874 new Kraft shares per Cadbury share. In addition, Cadbury shareholders will be entitled to receive a 10p/share special dividend following the date on which the final offer is declared unconditional. This total consideration represents 13x EBITDA, certainly towards the lower end of historic takeover multiples in the sector, and barely above the valuation attributed to Kraft’s recently-divested frozen pizza business (12.5x). Cadbury shareholders wishing to accept this offer must do so by 1:00pm (London time) on 2 February 2010. Details for this procedure will be found in the final offer documents which should be sent out in the next couple of days.
This represents an abrupt, and surprising, change of view for Cadbury and its senior management who have consistently portrayed Kraft as a “low-growth conglomerate” while making disparaging comments about its CEO, Irene Rosenfeld. But while Kraft has been derided by most market commentators, it has played its hand perfectly, in our view. It effectively bought Nestle’s cooperation by divesting its frozen pizza business to the Swiss giant, and took advantage of a lack of competing bids to submit a low-ball offer.
We believe that this new offer is still too low and abysmally undervalues such a unique and focussed confectionery company. Unfortunately, it will in all likelihood succeed given Cadbury’s recommendation, as well as the fact that 45% of its shares are controlled by American institutional investors, many of whom are risk arbitrage hedge funds seeking a quick profit.
In terms of a counterbid, Hershey is still lurking in the background and has until the 25th of January to clarify its official position. As we have contended in the past, we find it unlikely that Hershey will bid given the scale disadvantage, lack of synergies and financial resources, and considerable legal complexities. In the unlikely event the company bids, we do not believe it could top 850p/share.
Cadbury shares are currently trading at 835p, implying the market believes this deal will almost certainly be consummated. Therefore, private shareholders now need only decide if the extra 15p of consideration is worth the inconvenience and risk of holding US-listed Kraft shares.
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For further information please contact Phil Spencer on 0845 213 3356