Like a premium chocolate bar, Kraft’s agreed bid for Cadbury provides a mix that could ultimately satisfy chocoholic shareholders on both sides. Hershey of Pennsylvania may, theoretically, weigh in with a richer confection – UK regulators have given it until next Monday. But even matching Kraft’s original offer would have required Hershey to take on daunting debt, plus a highly dilutive equity issue. Without Nestlé or Ferrero to share the burden, its board would be reckless even to try to beat Kraft’s new offer.
For Cadbury investors, 840p per share (plus a 10p “special” dividend) is respectable, if not stellar. An enterprise value of 13 times historic earnings before interest, tax, depreciation and amortisation remains below most recent food industry deals. But it is better than Kraft’s original 12 times offer – and the 12.7 times Cadbury paid in 2002 for the Adams gum business, which now contributes a chunk of its revenues. Kraft, therefore, is by no means getting a steal. Cadbury shareholders, moreover, are receiving 500p, or 60 per cent of the total, in cash, against an original 300p, or 40 per cent.
Having upped its bid 12 per cent, Kraft may find it harder to argue it has not lost its discipline. The initial offer was lowball, and the company has identified an extra $50m of potential annual cost synergies, mostly in Cadbury’s regional cost structure. But those new savings – taxed, capitalised and assuming no extra integration costs – are worth $350m. Yet Kraft has raised its bid by $1.8bn. If it can deliver the synergies, while simultaneously growing Cadbury and dramatically improving profitability, paying a 50 per cent premium to Cadbury’s undisturbed share price will be justified. Doing so, however, while also battling the combined Mars-Wrigley, will be extremely tough.
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