Kraft’s third quarter earnings might have been delivered with jazz hands-a-waving, but those looking for hints of a heavily sweetened Cadbury offer were left disappointed.
While “remaining interested”, chief executive Irene Rosenfeld said Kraft would maintain a “disciplined approach” in its flirtation with the UK chocolate company.
The investment grade credit rating and dividend must be preserved, Rosenfeld said on the earnings conference call on Tuesday. Any acquisition would have to be accretive to cash EPS by its second year, and a combined Kraft-Cadbury must deliver a return on investment in excess of its cost of capital.
So where does this leave the Cadbury bid ahead of Monday’s takeover panel deadline?
JP Morgan analysts calculate that Kraft could lob in a further 70p to 80p on top of its base offer (currently valued around 735p), but that any further bump would stretch the company’s own targets for return on invested capital.
This is not a figure to get Cadbury investors banking on an offer north of 820p salivating.
But a placating factor, especially for UK institutional investors, would be if the cash component – 40 per cent in the base offer – was swollen.
Kraft could, JP Morgan calculate, manage to increase the cash element of the offer from 40 per cent to around 70 per cent, and still end up with an investment grade-friendly net debt to EBITDA ratio of 3.5 times.
Having secured a $9bn in bridge loan financing, something needed to show the UK Takeover panel it means business, Kraft would appear to now be in the position to sweeten the cash-share balance.
Nevertheless, the market is underwhelmed. Cadbury shares are trading 2p lower at 775p.
While the likelihood of a solid offer remains high (Nomura are recommending clients to hold on for an expected c.800p), when the kids are finally given their candy on Mondays, there could be a few tears.
Related links:
Reject opportunistic Cadbury bid, says FT Alphaville
Kraft dented by sluggish demand – FT
Even more hot chocolate – FT Alphaville
Too much chocolate can make you feel sick – FT Alphaville