Can Kraft afford to raise its £10.2bn offer for Cadbury, and if so, by how much?
It is a question we have been asking since the approach was revealed on Monday morning and the following was disclosed:
Financing would be on the basis that Kraft Foods would maintain an investment-grade credit rating.
So what then do the three big credit rating agencies make of the prospect of a raised offer? Unsurprisingly they have all put Kraft on negative watch.
Fitch, which rates Kraft BBB, notes that under the terms of the existing offer debt will rise by at least $10bn to $30bn, driving pro-forma total debt to EBITDA to a hefty four times:
If a definitive agreement is reached that places pro forma leverage in this range, the downgrade is likely to be limited to one notch.
Of course, that’s not going to happen given that Cadbury has already rebuffed the offer and Kraft is not going away. So…
Fitch will continue to monitor the discussions between Kraft and Cadbury, and will resolve the Rating Watch when there is further clarity regarding the potential for a merger and the terms thereof.
As for Standard & Poor’s, which rates Kraft as A-, it does not envisage lowering its rating below BBB (junk) under the terms currently under consideration. However, it adds:
“We believe that the substantial incremental debt that would be added to Kraft’s balance sheet to fund the proposed transaction will weaken key credit metrics below our expectations at the current rating level.”
Which brings us to Moody’s, which rates Kraft Baa2. Explaining its decision to put Kraft under review for a possible downgrade it said:
The review is based primarily on: i) Kraft’s currently weak credit metrics for the Baa2 category; ii) the increased financial leverage that would result from the proposed transaction; and iii) Moody’s belief that in order to consummate the transaction, Kraft likely will need to increase the value its proposed offer and its use of financial leverage.
Little wonder then that Kraft thinks Cadbury is only worth what someone is willing to pay for it.It doesn’t look to have the firepower to pay the price that Cadbury shareholders will probably demand.
Shares in Cadbury are currently flat at 786p.
Update:
We could be wrong. Perhaps Cadbury shareholders would back an increased offer. A look at the recent 8.3 regulatory disclosures shows that two of Cadbury’s investors have been selling. Capital Group has sold a total of 13.7m shares since the approach was announced. Meanwhile, Franklin Resources has sold 2m shares. Perhaps an offer of 850p would get it.
Related link:
Too much chocolate can make you feel sick – FT Alphaville