Strong Cadbury Results Up the Ante for Kraft

Cadbury (CBY) reported strong results Wednesday, but analysts are divided on what this means for Kraft’s (KFT) pursuit of the company.

“This upgrade increases the pressure on Kraft to up its offer before the ‘put up or shut up’ period runs out on Nov 9,” analyst Jeremy Batstone-Carr of Charles Stanley told Reuters.

“This puts the ball firmly back in Kraft’s court, and is exactly what Cadbury shareholders would have hoped for,” said Graham Jones, analyst at Panmure Gordon & Co. He called the third-quarter update “hugely impressive.”

“We think this statement, plus confidence expressed about 2010 and 2011, significantly reduces the chance of Cadbury being acquired on the cheap and as such we raised our target price from 860 pence to 900 pence,” Jones said.

“We think a successful bid for Kraft may need to start with a 9 rather than 8,” said analyst Warren Ackerman at brokers Evolution Securities, who thinks a rival bidding team of Nestle <NESN.VX> and Hershey <HSY.N> may still emerge for Cadbury.

Martin Deboo of Investec Securities said the results had shown that Cadbury management was doing its utmost to maximize the performance and the value of the business. “[The figures] have been a feisty confident statement and it will cause Kraft and others to recalibrate, to some extent, their expectations of the value of Cadbury,” he said.

Forbes reports that some analysts raised their earnings-per-share estimates on Wednesday or retained “buy” recommendations for the stock towards the top end of the 850 to 900 pence range, well above Kraft’s offer of 754 pence ($12.49) a share.

Nicolas Ceron, an analyst at Numis Securities in London, said he expected Kraft, which has a Nov. 9 deadline to come up with a final bid, would offer a final price of 880 pence ($14.58) a share. Separately, broker Execution Ltd. retained its “buy” recommendation on the stock and its target price of 920 pence ($15.24) a share.

Pablo Zuanic at JP Morgan said: “Our belief is a deal may be closed near or at 820p, with a much larger cash component than initially suggested.”

James Edwardes Jones, an analyst at Execution, was sceptical: ‘In the circumstances, Cadbury was always going to report as strong a Q3 performance as it could, and raise its guidance accordingly. ‘It looks unsustainable, but right now we would class that as the least of Cadbury’s worries.

Others think a bid closer to 800p might still do the trick in the absence of any other bidders.

“There is no reason why they (Kraft) would take a giant leap first because there does not seem to be a competitor in terms of this bidding process,” said Edward Jones analyst Matt Arnold.

Alicia Forry, the analyst at Liberum Capital, said the figures from Cadbury would lead to earnings upgrades of at least 5 per cent to consensus, which underpins expectations that Kraft will have to bid above 800p. But she said that for a price of more than 850p a competing bid would have to emerge.

Currency flctuations still may play a significant role in any formal bid from Kraft.

As noted by Research Recap, a weakening pound works in Kraft’s favor by increasing the value of its suggested offer. On Oct 14, the pound dipped below 1.58 to its lowest level since the initial proposal, which was based on a 1.64 exchange rate. However, the pound has rallied to over 1.65.

Finally, Eric Swanson at Hemscott offers a reminder of the limitations on a higher Kraft bid:

“We believe Kraft will have to enhance its bid, either by paying a higher price or by increasing the cash portion of the offer, which currently stands at 40%.”

Although a higher bid seems necessary, we stress that the deal could become value-destructive for Kraft at too high a price and may be limited by Kraft’s desire to retain its investment-grade rating.

Comments

[Tony Petroski:]

Why is this a good merger?

A great chocolate company swallowed by a cheesy American conglomerate.

Disclosure: I'm an American and my brother worked for Kraft (happily, selling magazines).

Oct 22 02:07 PM