Kraft regulatory progress may press Hershey to formalize bid

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Kraft (NYSE: KFT, A-/Baa2), having recently made proposals to the European Commission (EC) for clearance of its potential acquisition of Cadbury (LON: CBRY), is said to be close to securing full regulatory approval, a source familiar with the situation told dealReporter.

Last week, the EC extended its Phase I investigation to 6 January after Kraft submitted its remedies. The company’s positioning with regard to US regulators was then unclear, and it was thought that Kraft could be waiting to receive a full opinion from Europe before filing in the US so as to avoid a second request for information under Hart-Scott-Rodino, an industry attorney said.

According to a 15 December statement, Kraft has won approval from US regulators. If a stamp from the EC is also imminent for a Cadbury/Kraft combination, the first source said, Hershey (NYSE: HSY, A/A2) may feel pressure to formalize its bid so as not to appear to be bidding for Cadbury from a ”weaker position,” with respect to approvals gained.

Kraft, meanwhile, has until day 46, or 19 January, of the 60-day timetable set in motion on 4 December to present to Cadbury shareholders any improvement to its bid.

Still, it was said that even if Kraft makes headway on its acquisition checklist as the timetable ticks, Hershey can take its own sweet time, as it is not required to formalize a bid until day 50 after it announced its interest, or 23 January.

Even if antitrust concerns exist, it was said, the higher bidder wins, as long as its offer is ”reasonably north” of what’s already been rejected. But if two offers are somewhat similar in value, it was said, the lower bidder’s antitrust clearance would hold more weight, though shareholders would be likely to wait around and see the outcome of the higher offer’s regulatory process.

Market reports have speculated about the type of financing Hershey advisers could be stapling together as the Trust-controlled chocolatier decides how - or whether - to formalize its bid for the UK confectioner.

The bidder that can raise enough money to win over Cadbury’s Todd Stitzer & Co. may very well be the one willing to risk its access to the US commercial paper market. Kraft’s USD 9.1bn bridge financing agreement allows its credit rating to slide to BB+ or Ba1 before becoming null, and according to a recent media report, the Hershey Trust would not mind a BB- rating.

But even in lower investment-grade straits, a company’s commercial paper rating could be cut to A-3/P-3 from A-2/P-2, according to a person familiar with the consumer companies’ credit. Both companies utilize commercial paper in their daily operations, the person said, noting that Hershey currently enjoys a rating of A-1 compared to Kraft’s A-2. Kraft, said to be adamant about maintaining its A-2 commercial paper rating, would need to keep its leverage above the BBB- territory.

As for the notion that Hershey and Cadbury were in nascent merger talks before Kraft made its first offer in late August, all sources and parties with knowledge of the situation said they would be ”very surprised” if such a dialogue had occurred. The first source said any previous talks about a friendly Cadbury/Hershey deal had been halted as long ago as 2007.

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