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Published: September 11, 2009
Kraft Foods Inc.’s (NYSE: KFT) $16.7
billion unsolicited takeover attempt of Cadbury PLC (NYSE ADR:
CBY) is the latest sign of consolidation in the highly
competitive food industry, and will likely lead to two things: A
bidding war for Cadbury and further consolidation in the sector.
The world’s second-largest foodmaker went public with its bid
for Cadbury earlier this week after being snubbed privately.
Kraft’s offer -- a 31% premium to the chocolate maker’s Friday
closing price of $37.46 a share -- “fundamentally undervalues”
Cadbury, it said. The offer is less than 15 times Cadbury’s 2008
earnings before interest, tax, depreciation and amortization (EBITDA).
“Any follow-up offer by Kraft would likely involve a higher
price,” Moody’s Investor Service senior analyst Brian Weddington
said in a note. “The increased leverage that would result under
the proposed transaction would be considerable.”
Increased leverage could be a boon to Cadbury
and its investors, as The Hershey Co. (NYSE: HSY) will
likely throw its hat into the bidding ring, one person familiar
with the matter told The Wall Street Journal.
“Hershey recognizes that Cadbury is the last major confectionery
company potentially available and, as such, is likely to make
some response,” the person told The Journal. Nestle Chief
Executive Officer said his company is always “open to
acquisition opportunities if they fit strategically.”
Some analysts have Hershey teaming up with rival Nestle SA to
make a joint offer for Cadbury and splitting its business,
Reuters reported.
If Kraft and Cadbury can reach an agreement, it
would be “bad news” for Nestle, Icap PLC analyst Andy Smith told
Bloomberg News. “[Nestle has] the firepower to counter if they
want.”
Cadbury and Kraft’s
combined sales in 2008 were $51
billion, roughly half of Nestle’s in
the same period.
However, Hershey’s position is less
flexible.
The Pennsylvania chocolate maker has
$1.7 billion in net debt and a
market capitalization of $8.9
billion. Cadbury is valued at $17.7
billion, so any takeover by Hershey
would require serious financing,
according to The Journal.
Hershey could pursue a joint effort
with Nestle, but that would mean
turning Cadbury’s lucrative gum
business over to the Swiss candy
company to avoid antitrust issues.
Cadbury has almost 29% of the global
gum market. The other big player in
the sector is privately held Mars
Inc., which became the world’s
largest confectioner last year when
it teamed with Warren Buffet’s
Berkshire Hathaway Inc. (NYSE:
BRK.A, BRK.B) to buy chewing gum
icon Wm. Wrigley Jr. Company for $23
billion. Berkshire owns about 9.4%
of Kraft’s shares, according to
Reuters.
In January 2007, Cadbury Chief
Executive Officer Todd Stitzer
agreed with Hershey’s then-Chief
Executive Officer Richard Lenny to
remove that obstacle and suggested
they create a “global confectionary
powerhouse.” But any potential
merger was held back by Cadbury’s
beverage business, which included
Dr. Pepper and Snapple.
Cadbury spun off its beverage
business in May 2008, which resulted
in the birth of the Dr. Pepper
Snapple Group Inc. (NYSE: DPS).
Chances for a reverse scenario of
Cadbury acquiring Hershey are slim,
as the Hershey Trust is set on
protecting the Hershey name and
keeping it an American company.
“Simply put: We will not sell the
Hershey Co.,” Hershey Trust Chairman
LeRoy Zimmerman said in an opinion
piece published last year in the
Patriot-News of Harrisburg, PA.
While a number of analysts expect
Kraft to raise its bid for Cadbury,
the foodmaker is in a tight position
because it does not have that much
room to maneuver without threatening
its balance sheet or risking its
investment grade credit rating. The
company already has almost $19
billion of bonds outstanding,
according to Bloomberg.
Other companies mentioned as
possible suitors are Kellogg Co.
(NYSE: K) and PepsiCo Inc.
(NYSE: PEP).
The worst economic downturn since
the Great Depression and rising
commodity costs have sent consumers
looking for less expensive products
at the grocery store, limiting
companies’ ability to grow. As with
Mars’ acquisition of Wrigley last
year, companies are looking to
consolidation for growth.
“Consolidation in the food sector
has long been anticipated,” an
unnamed merger advisor told Reuters.
“Given the drop in [bottled] water
revenues, Nestle and Danone are
thought to look at acquisitions to
spur revenue growth.”
For Kraft, a successful acquisition
of Cadbury would spur its growth by
expanding its presence in emerging
markets like China, Brazil, Russia,
and especially India. Cadbury is
deeply entrenched in British
Commonwealth nations such as India,
where it has been selling chocolate
for more than 60 years.
A takeover of Cadbury India “would
open up a $500 million chocolate
market which is growing at +15% per
year,” Angel Broking Ltd. analyst
Anand Shah told The Journal.
“I believe that in the current
global economy, the growth prospects
are constrained,” said Kraft Chief
Executive Officer Irene Rosenfeld.
Shares of Kraft closed at $26.85
Wednesday, up +1.51% or 40 cents,
while Cadbury closed at $51.80, down
-0.15%, or eight cents.
-- Bob Blandeburgo
Associate Editor
MoneyMorning.com
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