Is Kraft Cadbury's Only Probable Suitor?

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Includes: CBY, HSY, LDSVF, MDLZ, NSRGY
by: Véronique Adam

Stock price: 790p ($37.46)

Kraft’s bid? Any upside left?

We see two reasons why Kraft (KFT) is suiting Cadbury (CBY): one is its commitment to increase its exposure to emerging markets; the second is to create operational leverage in Western Europe by combining its chocolate portfolio with its acquired European cookies business.

We feel that Kraft might be the only probable suitor.

  • Nestle (OTCPK:NSRGY)? Although premium chocolate could fit with health, nutrition and wellness, this is not what Cadbury is about. In addition, Nestle’s CFO has also said in the past that Nestle is not interested in gum. As a result, we are not convinced that Nestle is ready to make a multi billion bid for Cadbury or Hershey (NYSE:HSY). Nestle might be interested in smaller players like Lindt (OTCPK:LDSVF) or Ferrero or in joining together with a partner like Hershey in confectionery.
  • Hershey (HSY)? Hershey Trust does not seem to be prepared to lose its controlling interest in the company. They may accept being diluted to 51% and join in a JV in order to get better access to international markets.

At what price? 745p implies 31% premium and almost 22x P/E and 12x EBITDA based on 2009 estimates. Kraft believes it can generate £380m synergies, which would represent 6% of Cadbury sales; such a ratio looks in line with previous M&A deals in the consumer sector.

We think that the offer price could be increased to around 850p (13.5x EBITDA), which is below the 14-15x range seen in previous deals, but still generous considering a tougher environment in the consumer field. We thought the stock was fully valued on a standalone basis at 568p.

Consequently, Cadbury management will find it difficult to justify sticking to a standalone strategy and refuse the offer.