Money Matters - Simplified

Cadbury refuses merger bid by Kraft

Cadbury has rejected a merger offer by Kraft Foods Inc. saying it does not do justice to the company's stature

London, September 7 -- The U.S. food giant Kraft Foods Inc. (NYSE:KFT) on Monday proposed a 10.2 billion pound ($16.7 billion) merger bid for British maker of chocolate, gum and candy, Cadbury PLC (LSE: CBRY, NYSE: CBY). However, the proposition was instantaneously declined by Cadbury.

The reason given by Cadbury was that the offer underrates the company’s stature. It expressed assurance in its “standalone strategy and growth prospects as a result of its strong brands, unique category and geographic scope”.

But this attitude has not deterred Kraft and the company said that it will keep on trying to come to an agreement that is acceptable to the Cadbury board.

It is being contemplated that Hershey and Nestle might also propose a counter bid. Nestle is chiefly keen on acquiring Cadbury’s gum business. On the other hand, Hershey is interested in the chocolate-confectionery brands, along with some other concerned parties.

Kraft’s proposal
Kraft, whose brands include Velveeta cheese product and Oreo cookies, revealed that it had put forth the proposal that it will pay 300 pence in cash and 0.2589 new Kraft Foods shares per Cadbury share. That would have made Cadbury shares reach 745 pence.

This means that there would be a 31 percent premium over Cadbury’s closing share price of 568 pence on Friday.

Kraft, headquartered in Northfield, Illinois, believes that the amalgamation with Cadbury would create “a global powerhouse in snacks, confectionery and quick meals,” with top spots in developing markets like India, Mexico, Brazil, China and Russia.

Elaborating on their plans, Irene B. Rosenfeld, Chairman and CEO of Kraft Foods, said, “This proposed combination is about growth. We are eager to build upon Cadbury’s iconic brands and strong British heritage through increased investment and innovation.”
What the analysts have to say
Graham Jones, analyst at Panmure Gordon & Co., said that in order to work out a deal the shareholders must hold out for at least 800 pence a share.

Jones was quoted as saying, “A key question is whether there is a counter bid, most likely from a Nestle-led consortium. However, we see the most likely scenario being Kraft being successful on improved terms.”

Another analyst, Jeremy Batstone-Carr at the Charles Stanley & Co., said that more than 800 pence might be required for a successful merger.

Batstone-Carr said, “Note that the Kraft offer values Cadbury on less than 2 times sales, significantly lower than the 2.3 times sales it paid for Danone’s biscuit operations or the 3.7 times sales paid by Mars for Wrigley.”

Cadbury-world leader in confectionary market
Cadbury is a leading confectionary company and has its presence worldwide. The company had a 10.3 percent share of the total world confectionary market in 2008. This was next only to Mars Inc. which had a 14.8 percent share. Kraft stood at the fifth position with a market share of 4.5 percent.

Cadbury has total share of 28.4 percent in the world gum market, while Kraft has only 0.1 percent.

Cadbury is on a high after its net profit almost tripled during the first half of the year. The company benefited a lot as the chocolate consumption increased. Also, the beverage business proved to be very profitable.

On the other hand, the second-quarter profit of Kraft jumped 11 percent to $827 million. But there has been a drop in the revenue as it fell 5.9 percent to $10.16 billion.