As shareholders in Kraft are discovering on Tuesday. Consider the share price moves displayed in the screenshot below:
In light of that share reaction will Kraft come back with a higher offer? And if so, how will they fund it?
Merrill Lynch reckons Kraft would need an equity issue if it increased its bid to 850p, which would probably be rejected by the board of Cadbury in any case:
In order to maintain an investment grade rating, any incremental funding for a raised offer would have to be equity, making the transaction exponentially less attractive to Kraft on short term earnings enhancement or WACC measures.
All of which is interesting because the question of Kraft’s investment grade rating was touched upon in today’s conference call.
We paraphrase:
We’re disciplined buyers, we’re targeting IRR higher than cost of capital, EPS accretive and investment grade rating, they’re all important. Not about what we can afford but what makes sense and Kraft has done a good job in allocating resources to the right opportunities and this is reflected in the international results.
Perhaps Cadbury will remain independent after all.
Related link:
Kradbury: More hot chocolate – FT Alphaville