Cold Response to Kraft’s Cadbury Bid

Cold Response to Kraft’s Cadbury Bid
By JULIA WERDIGIER and MICHAEL J. de la MERCED
Copyright by the New York Times
Published: November 9, 2009
http://www.nytimes.com/2009/11/10/business/global/10kraft.html?ref=global-home


LONDON — Kraft took its $16.3 billion bid for Cadbury, the British chocolate and chewing gum maker, directly to shareholders on Monday after the Cadbury board rejected the offer as too low.

But Kraft did not raise its offer, sticking with its original proposal from September. Kraft, which makes of Ritz crackers and Oreo cookies, offered £3, or $4.90, in cash and 0.2589 new Kraft shares for every Cadbury share. The offer values each Cadbury share at £7.17, a 26 percent premium to the price before Kraft made its original proposal.

Cadbury’s shares initially dropped 1.72 percent in London after Kraft’s announcement, indicating that investors became less optimistic that a deal would materialize, before increasing slightly. The shares remained above the offer price, at £7.63 a share.

Analysts had expected Kraft to sweeten its original proposal. But in its filing with the London Stock Exchange, Kraft again asserted that its latest pitch was full and fairly priced. Monday’s offer, it said, had an enterprise value of 13.9 times Cadbury’s earnings before interest, taxes, depreciation and amortization, or Ebitda. Cadbury’s own acquisition of Adams in 2002 was valued at 12.8 times Ebitda, Kraft said.

That was not enough to persuade the Cadbury board to change its mind.

“The repetition of a proposal which is now of less value and lower than the current Cadbury share price does not make it any more attractive,” Roger Carr, the company’s chairman, said in a statement. “As a result, the board has emphatically rejected this derisory offer and has strengthened its resolve to ensure the true value of Cadbury is fully understood by all.”

The reason the offer was lower than the September proposal, Cadbury’s board said, was because Kraft’s share price declined 4 percent since then.

“Kraft’s offer does not come remotely close to reflecting the true value of our company,” Mr. Carr said, “and involves the unattractive prospect of the absorption of Cadbury into a low-growth conglomerate business model.”

Analysts had long supported Kraft’s rationale for the merger, which would add Trident gum and Dairy Milk chocolates to Kraft’s brands and help the American food company expand into faster growing countries like India, South Africa and Mexico. But they said Kraft would have to increase its offer to at least £8 a Cadbury share to succeed.

“We remain convinced of the strategic merits for both companies of combining Kraft Foods and Cadbury,” the Kraft chief executive, Irene Rosenfeld, said in a statement. “We believe that our proposal offers the best immediate and long-term value for Cadbury’s shareholders and for the company itself.”

Rival bidders for Cadbury have not emerged. Kraft’s move on Monday was the result of a deadline set by Britain’s Takeover Panel to either make a bid Monday or be barred from making another for Cadbury for six months.

Earlier this month, Kraft cut its forecast for net organic revenue growth, disappointing analysts even as its third-quarter results beat expectations. Cadbury’s management and board have said that Kraft’s offer substantially undervalues its future prospects. Last month, Cadbury reported stronger-than-expected results, which it said reinforced its argument that the company’s prospects are better as an independent entity than as part of a “low-growth” conglomerate.

Kraft reiterated that it expects a merger to achieve $625 million in pretax annual cost savings and that there “is potential for meaningful revenue synergies.” A combination would create a global food and confectionery giant with more than 40 confectionery brands and annual revenue of $50 billion, Kraft said.

Since Kraft first made its expression of interest in September, analysts and dealmakers have watched the repartee between it and Cadbury in what could be one of the biggest mergers this year — if Kraft succeeds. Both sides have already hired teams of investment banks and law firms to gird for a fight that could last months.

Julia Werdigier reported from London and Michael J. de la Merced from New York.