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Source: Reuters -
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Kraft Foods says it is determined to pursue Britain's
Cadbury, which soared in value after it snubbed a $US16.7 billion
($NZ24 billion) bid from the American group, reinforcing hopes of a
broader-based pick-up in merger activity.
Analysts say North America's biggest food group might have to raise
its offer by up to 40% after shares in the world's No.2 candy and
chocolate maker increased by almost half on news of the approach,
settling at just under 800 pence compared with Kraft's 745
pence-per-share pitch.
The price spike reflects analysts' views the combination would be a
success, chances of a counter-bid and bankers' hopes that rallying
equity markets and a brighter economic outlook to make companies
more confident about deals might mean an M&A revival was just
around the corner.
"No one is questioning the rationale for this tie-up, all the
chatter is about price," one senior M&A banker said.
"It's a classic strategic deal that has been anticipated for a
number of years."
Cadbury, whose brands include Bassett's Liquorice Allsorts,
Maynards Wine Gums and its trademark chocolate bars, had sales of
5.4 billion pounds ($NZ12.7 billion) last year while revenues at
Kraft, which makes Maxwell House, Oreo cookies and Ritz crackers,
were $NZ60 billion.
Kraft says its cash-and-shares offer represents a 42% premium to
Cadbury's share price on July 3, when analysts raised the
possibility of sector consolidation.
Cadbury's stock closed up 38% at 783 pence, having peaked close to
its all-time high at 808p.
"Our initial view is that this represents a competitively-pitched
offer, but something less than a knockout blow," says Investec
analyst Martin Deboo.
"For a useful comparison, we think that investors need to look as
far back as Nestle's acquisition of Rowntree in 1988, where we
recall that the exit premium was in excess of 100% of Rowntree's
pre-speculation share price."
Panmure Gordon & Co recommended investors hold out for at least
800 pence a share and Bernstein Research suggested a price of
between 855 pence and 1,070 pence might be achievable based on
earnings potential and past deals.
Mars rival
One top 20 investor in Cadbury who declined to be named also says
benchmarks set by other deals indicate Kraft will need to offer at
least 10% more, and you could be looking at 20% to 30%
higher.
Kraft has offered 300 pence in cash and 0.2589 new Kraft shares per
Cadbury share in the hope it can create a global powerhouse in
snacks, confectionery and quick meals with combined revenues of
about $NZ72 billion.
Evolution Securities, which sees fair value for Cadbury in any
takeover of at least 1,000 pence a share, says a tie-up will put
the group neck-and-neck with Mars-Wrigley, with each boasting about
15% of the global confectionery market.
It would still be half the size of Nestle which reported revenues
last year of 109.9 billion Swiss francs ($NZ150 billion).
Consolidation hopes helped drive shares in the food and drink
sector as a whole up 2.9%, outperforming a 1.3% rise for European
blue-chips.
M&A revival?
Analysts have also raised the prospect that Nestle might make a
counterbid for Cadbury, perhaps in a joint approach with US
chocolate group Hershey Co.
"The most likely alternative bid would come from Nestle, although
it would face considerable anti-trust issues and lower cost
synergies," analysts at Cazenove wrote in a research note.
Nestle Chief Executive Paul Bulcke has declined to comment directly
but says the company has no major acquisitions planned though it is
always open to opportunities.
Cadbury says it believes Kraft's approach fundamentally undervalued
the British company.
Illinois-headquartered Kraft says it is not ready to throw in
the towel, however, describing itself as committed to working
toward a recommended transaction and to maintaining a constructive
dialogue.
Analysts agree a deal makes sense, but at the right price.
"We think it makes perfect sense for Kraft to acquire Cadbury and
they should do it ... subject to the right price for both parties,"
Bernstein analysts wrote.
Global merger and acquisition activity fell 44.5% to $US872.5
billion in the first half of 2009, according to Reuters data - the
lowest first half volume since 2003 and the steepest decline since
2001.
Lazard is acting as lead financial adviser to Kraft with Centerview Partners, Citigroup and Deutsche Bank also advising.
