eirmoney | Cadbury Takeover Enters New Round

Cadbury Takeover Enters New Round

Posted by Anil Bagra | 17 January 2010

The unending saga of Cadbury takeover seems to have taken a new turn. After Kraft Foods facing severe criticism from shareholders for over valuing Cadbury, US based food company Hershey is preparing a counter bid for Kraft.

Hershey has tapped private equity investors to finance the deal. The Hershey Trust is also likely to make an equity investment of US$1.25 billion towards the acquisition. Hershey’s offer is certainly audacious given the fact that the company is half the size of Cadbury. Moreover, Hershey will be locking horns with a competitor nearly five times its size.

Since Kraft placed its offer, Cadbury’s shares have traded above the offer price of 771 pence. The shares closed at 793 pence in trading at London Stock Exchange. Considering the interest of Hershey, Kraft is likely to increase its offer to 820 pence, although no formal announcement has been made yet. The deal, if closed, will make Kraft - Cadbury the world’s largest confectioners. The combined company would have revenue of about US$50 billion.

The magnanimity of Kraft’s existing bid at £10.2 billion has put off many interested parties. Earlier, major food and confectionary players including Nestle, Ferrero and Hershey evinced interest in the company. However, the fear of losing favourable credit ratings has dampened the takeover efforts. Global food leader Nestle SA was initially rumoured to make a competing bid to acquire Cadbury, but later decided to content itself with smaller acquisitions like the pizza business of Kraft for US$3.7 billion. Quite contrary to Kraft which is expected to burden itself with debt in the process of acquiring Cadbury, the Swiss company remains cash rich.

Hershey is going solo for acquisition as opposed to its earlier plan of teaming up with Italian candy player Ferrero for the counter bid. Ferrero’s decision of not bidding for Cadbury came after considering that substantial debt needed for the deal will hamper its credit ratings.

Despite Hershey’s relatively smaller size, one of the factors acting in favour of the company is Cadbury’s willingness to accept it as a shareowner. Hershey already holds rights of the Cadbury brand in US and the camaraderie of yesteryears is likely to work in favour of Hershey.

To make things worse for Kraft, Cadbury management had termed the former’s offer as “derisory”. In addition, the British chocolate maker has posted strong results for 2009. The company is trying to use the robust performance for the year to repel Kraft or revise the offer on the higher side. According to a British daily Sunday Times “a group of 14 hedge fund managers with shares in Cadbury told Irene Rosenfeld, chief executive of Kraft, last week that they wanted at least 850 pence a share”. While 850 pence seems to a call too out of the way for Kraft, a revised offer at 820 pence looks increasingly possible. Kraft is in no mood to give up easily and would try to mend its relationship with Cadbury management.

Edit: Kraft have this week had an offer accepted by the powers that be at Cadbury. Cadbury will now recommend that shareholders vote in favour of the takeover. The new offer is in the region of 11.9 billion pounds sterling.