So, Hershey has entered the fray.
From RNS on Wednesday:
The Hershey Company (“Hershey”) notes the recent press speculation regarding a potential offer for Cadbury. Hershey confirms that it is reviewing its options and at this stage there can be no assurance that any proposal or offer from Hershey will be forthcoming. A further announcement will be made in due course if appropriate.
Ferrero soon followed with a similarly dull holding statement:
Ferrero notes the recent press speculation regarding a potential offer for Cadbury. Ferrero confirms it is in the preliminary stages of evaluating its options in respect of Cadbury.
There can be no certainty that any proposal relating to Cadbury will ultimately be forthcoming.
Details are fuzzy, but if Hershey really has serious designs on the Birmingham-based confectioner then it will need to scrape together a rather voluminous sack of cash.
Cadbury shares may be up on the news, but credit markets are not reflecting the balance sheet risk hanging over Hershey just yet.
The cost of insuring Hershey’s debt against default hasn’t budged much, as shown in the Bloomberg grab below.
CDS markets are as fallible as any other. But this is not how one would expect a company’s CDS to behave if investors were convinced it was considering taking on debt close to the size of its own market capitalisation.
As JP Morgan analysts argued on Wednesday morning, it is difficult to see how the financing would work for Hershey without it either almost doubling its existing equity (and convincing shareholders to buy it), or losing its investment grade credit rating.
HSY has $5B in sales, $1B EBITDA, and close to $2B net debt, and we estimate at most it could take on another $4B deal-related debt before losing investment grade (the incremental Cadbury chocolate EBITDA would be only about $800M), or about £2.3B, so another £4.7B in equity would be needed (almost the size of the current HSY market cap; note KFT is increasing its equity by 25% with a single class share structure). The big question mark is how much equity can HSY raise from existing shareholders through a rights issue (we doubt Ferrero or Cadbury shareholders would take HSY non voting shares) without the Trust subscribing to the rights and HSY still keeping its dual class share structure (The Hershey Trust owns an 80% voting interest and a 32% economic interest in HSY). Sure, the math works (i.e. HSY could raise enough equity with the Trust still holding 50.1% voting control, assuming a minimal discount) but we are not sure 5-10% discounts would be tolerable for a rights issue of this magnitude. A rights issue would only work if the Trust decided to move to a single class share structure, but we see than as unlikely as it would lose control.
With almost every bank on the Street reportedly being part of Kraft’s loan syndicate, it will be interesting to see who Hershey has managed to get on board to fund the deal (if the company opts for that route).
And as an added bonus, here is a graph of the most recent short selling interest in Hershey from Data Explorers:
UPDATE:
The credit markets have caught up with the news. After the US open on Wednesday, Hershey’s CDS spread duly blew out wider. Reuters reports:
NEW YORK, Nov 18 (Reuters) – The cost to protect Hershey Co’s (HSY.N) debt with credit default swaps doubled on Wednesday after sources said Hershey and Italy’s Ferrero would mount a $16-billion plus bid for Cadbury Plc (CBRY.L).
Some analysts and investors still see U.S. hostile bidder Kraft Foods Inc (KFT.N) as the front-runner, yet five-year credit default swaps of Hershey rose to 85 basis points, more than double the 42 basis points level on Oct. 5, the last most significant trade, according to data from Phoenix Partners Group.
Related links:
Kinder Surprise for Kraft? – FT Alphaville
Kradbury: Come on Irene – FT Alphaville
Reject opportunistic Cadbury bid, says FT Alphaville