Cadbury shares burst through the 800p level this morning, with much chatter in the market over whether Nestle could launch a counterbid.
The main hitch would be that a combined Cadbury-Nestle would hold close to half of the UK chocolate market – something unlikely to get past the Office of Fair Trading and then the Competition Commission.
Other possible bidders include Hershey (complicated by being run by a trust which would not want to relinquish control) and Unilever, which currently has no proper confectionery play and is unlikely to go for one now.
Mars is seen as another possibility but as it is private any deal would have to be funded with pure cash. Mars would then have to overcome the prohibitive 50 per cent plus UK chocolate market share it would end up with.
Nestle however have long been believed to see Cadbury’s gum business as a way to grow, and would possibly sell off the chocolate assets to manouvre around any competition issues. This could give rise to the possibility that Nestle and Hershey launch a joint bid and split the company up along those lines.
Here is Numis’ take:
We believe that Nestle might be interested in the gum business but antitrust issues in the UK might prevent it from bidding for the whole confectionery business. A joint bid with Hershey is possible. In our view Cadbury management intends to remain independent and therefore will seek a merger with Hershey. This might force Kraft to sweeten the deal by increasing the proportion paid in cash and/or the price paid.
Nestle shares however have done little this morning:
However, we would question just how quickly Hershey can move, given its complicated capital structure.
From the Hershey annual report.
Hershey Trust Company, as trustee for the benefit of Milton Hershey School (the “Milton Hershey School Trust” or the “Trust”) maintains voting control over The Hershey Company. Historically, the Milton Hershey School Trust had not taken an active role in setting our policy, nor had it exercised influence with regard to the ongoing business decisions of our Board of Directors or management.
However, in October 2007, the Chairman of the Board of the Milton Hershey School Trust issued a statement indicating that the Trust continues to be guided by two key principles: first, that, in its role as controlling stockholder of the Company, it intends to retain its controlling interest in The Hershey Company and, second, that the long-term prosperity of the Company requires the Board of Directors of the Company and its management to build on its strong U.S. position by aggressively pursuing strategies for domestic and international growth.
That said, Hershey is unlikely to want to lose its distribution deals with Cadbury, especially to Kraft.
Hershey has license agreements with affiliated companies of Cadbury Schweppes p.l.c. to manufacture and/or market and distribute YORK, PETER PAUL ALMOND JOY and PETER PAUL MOUNDS confectionery products worldwide, as well as CADBURY and CARAMELLO confectionery products in the United States. The Corporation’s rights under these agreements are extendible on a long-term basis at the Corporation’s option. The license for CADBURY and CARAMELLO products is subject to a minimum sales requirement which the Corporation exceeded in 2003.
As for Kraft, traders reckon it will struggle to raise the cash component of its offer by more than 90p and that’s because it would face a downgrade by the credit rating agencies.
Kraft has issued a total of $13.5Bn (including €2.85Bn bonds) that have rating triggers:
Essentially, this amount of public bonds include covenants that restrict Kraft’s ability to incur debt secured by liens above a certain (undefined in the 10K) threshold
* There is a 101% change of control put
* There is also a 101% out on the bonds if the ratings fall below an investment grade rating by each of Moody’s, S&P and Fitch, within a specified period (in the bond doc’s)
* Kraft’s current ratings are Baa2/BBB+/BBB by the three rating agencies.
The rating trigger on the public bonds seems to be the reason that Kraft is aiming to maintain an investment grade trigger in the CBRY acquisition.
Related links:
Lucky escape for Cadbury shorts – FT Alphaville
Cadbury wispas – FT Alphaville
Dear Cadbury’s… - FT Alphaville
Cadbury rejects £10.2bn move by Kraft – FT Alphville