Shares in Cadbury are trading through the terms of Kraft’s hostile approach on Monday morning, as the market bets on an increased offer or a counter bid.
Kraft is offering 745p in a mixture of cash and stock for Cadbury, which is currently trading 205p, or 36 per cent, higher at 774p.
Although Kraft’s offer values Cadbury at around 21 times perspective earnings, it is the same EV/EBITDA multiple (12) Mars paid for Wrigley, a deal which is widely viewed as having changed the industry landscape. Indeed, this point was quickly seized upon by analysts this morning.
For instance, Evolution Securities:
Background: In 2007, Mars bought Wrigley for US$23bn creating a global confectionery powerhouse with 15% market share..in our view this made a deal for CBRY inevitable as it fundamentally changed the confectionery economic landscape. Timing is ideal because a)CBRY have exited all their beverage business b)All bid spec out of the stock.
Rationale: 1) Would move Kraft to neck and neck with Mars/Wrigley with c15% global share 2)Few anti-trust issues. KFT are strong in choc in Latam/Europe where Cadbury are weak. CBRY are strong in gum in those regions 3) Would enhance Kraft’s revenue by 100bps to 5%, margins & EPS (7-9% to 9-11%) & wd be accretive in year 2 4) US$625m of annual synergies (4-5% of combined confectionery revs) 5) Create a global powerhouse with US$50bn of revs.6)CBRY have a 30% global share in gum which is only 600bps behind Wrigley.
As for the possibility of a counter bid from either Nestle or Hershey, Evolution thinks it could happen:
**We think there is a reasonable chance that Nestle/Hershey could counter bid with NESN taking gum & Hershey taking chocolate. Remember Mars paid 34x PE for Wrigley & 18x EBITDA so Kraft offer looks a low ball bid so its not surprisingly CBRY board has rejected it. CBRY’s CEO Todd Stitzer has always said that CBRY wanted to be the consolidator of the global confectionery industry not the consolidatee. Cleverly Kraft have said that they will not close key Cadbury UK facilities such as Somerdale and will thus preserve UK jobs…playing the political angle.
However, Cazenove says there would be competition issues:
We continue to believe that it makes commercial sense for Kraft to acquire Cadbury particularly in Europe and Latin America. We had previously valued the Cadbury assets at 800p per share and had assumed in a Kraft acquisition of Cadbury cost syneriges of $605m, or 4% of combined confectionery sales. In our view, the most likely alternative bid would come from Nestle although it would face consdierable anti-trust issues and lower cost synergies.That said, those betting on an increased offer or cash component from Kraft, would do well to remember that it has $15bn worth of debt following its recent acquisition of the Danone biscuits business.
Meanwhile Sanford Bernstein’s Andrew Wood, the sector’s top rated analyst, says Cadbury was right to reject the offer.
The 31% premium to Friday’s close might seem attractive, but we think Cadbury can get much more. Some very, very quick numbers are: – We think 15-16x EBITDA is a reasonable multiple…Mars paid 19.5x for Wrigley in May 2008, and arguably Cadbury has much more profit growth potential than Wrigley had at that time.
- At 15-16x 2008 EBITDA we get £8.55-£9.20
- At 15-16x 2009 EBITDA we get £10.00-£10.70
• Clearly there is much more to come…
Let the battle commence…
Update:
Higlights from the Kraft conference call. H/T Friendly Broker.
KFT= Kraft. CBRY = Cadbury
Financing
KFT was asked about how it intended to fund the acquisition of CBRY given the debt taken on board from the Danone biscuit biz. KFT claims it does not anticipate any issues in financing the transaction – notes good access to debt capital markets, good relationship with lending banks. A deal should be fully debt funded and KFT has no plans to tap the equity markets.
Increased offer
KFT was asked if 300p was the max it could pay in cash if it did not issue equity. KFT won’t really comment just saying 300p gves certainty and this is a good offer. Would KFT consider a higher bid – KFT gave the standard “it’s good value for shareholders” line etc. KFT was asked to rule out a hostile bid for CBRY – KFT responds that friendly dialogue is best but won’t rule out hostile deal.
Anti trust
Asked about regulatory issues and potential for disposals to fund a deal. KFT says the complementary nature of two businesses suggests antitrust issues are few and limited in scope. Any issues will be addressed within the envisaged timetable. KFT is not assuming any divestitures at present. Comfortable with both portolios.
Related links:
Dear Cadbury’s – FT Alphaville
Cadbury rejects £10.2bn move by Kraft – FT