Ambassador, you are really spoiling us with these bid stories.
Various European press reports of the possibility of a Kraft-melting Ferrero-Cadbury tie-up have set chins a wagging in London on Tuesday morning.
The Telegraph’s London market report floated the idea that Ferrero had been talking with NM Rothschild about teaming up with another party to mount a joint counter bid for Cadbury.
Italy’s Il Sole 24 Ore meanwhile reported that Cadbury’s management were plotting a defence against Kraft’s hostile bid by pulling together an a partnership between Ferrero and the British confectioner.
Last week, when the FT Alphaville team first heard talk of Cadbury pondering a tie up with the ambassador’s favourite chocolate maker, we dismissed it as something a chocolate-addled financier might have dreamed up in the bath.
But having taken a closer look, the idea is not as loopy as it seems.
Firstly, Ferrero is bigger than many would first expect. Aside from Ferrero Rocher, the company also owns major brands such as Nutella, Kinder and Tic Tac.
As a private company it is difficult to gauge Ferrero’s exact market share and financing capacity (if there is not a merger). Ferrero’s sales in 07/08 were €6.2bn, slightly smaller than the €6.7bn pulled in by Cadbury.
A key pillar in Cadbury convincing shareholders of the merits of `the Ferrero defence’ would be the scope for synergies between the two companies.
Ferrero’s sales are mostly concentrated in Europe, but its key markets — Italy, Germany, and France — are countries where Cadbury has a small to negligible market share, and could benefit from a tie-up.
AC Nielsen data shows that as of last year Ferrero held a 25.7 per cent share of the chocolate market in France, 41.5 per cent in Italy and 27 per cent in Spain. Cadbury’s holds just 3.5 per cent of the French chocolate market, and nearly none in Germany and Italy.
Ferrero meanwhile holds around 3 per cent of the UK chocolate market, meaning any deal would avoid the competition issues that would face Nestle (18 per cent).
Nomura’s European food team have run some back-of-the-envelope synergy calculations which estimate a combination could derive ₤350m of savings, equivalent to 3 per cent of combined sales.
When revenue synergies and restructuring charges are taken into account, Cadbury shareholders could make 140p per share.
If, Nomura note, Cadbury could construct a compelling enough defence case, with more detail on savings and margin targets, then this could prove a “very credible alternative to a raised Kraft offer”.
At this stage the `Ferrero defence’ is likely to be just an idea, and one that could well be being cynically propagated by advisors to inject a semblance of competitive tension into a bidding process threatening to become very dull.
But there is some logic here nonetheless. Like Cadbury, Ferrero will not want to be left flapping in the wind as global consolidation in the sector continues.
A merger between the two companies would avoid Ferrero becoming a target itself down the line. Maybe the time has come for it to make a move.
Related links:
Kradbury: Come on Irene – FT Alphaville
Reject opportunistic Cadbury bid, says FT Alphaville
Even more hot chocolate – FT Alphaville
Too much chocolate can make you feel sick – FT Alphaville