Kraft-Cadbury Deal Melting as Kraft Results Disappoint

Includes: CBY, MDLZ
by: Research Recap

As suggested by Research Recap two months ago, there’s a good chance there will be no merger of Kraft (KFT) and Cadbury (CBY) – at least for now. In Kraft-Cadbury: Deal or No Deal?, we outlined the reasons why such a combination might not make sense, noting that Sanford C. Bernstein’s Andrew Wood considers that Kraft would need to increase its offer up to £9.00 [from £7.45].

“This may be further than Kraft is willing or able to sensibly go in today’s more cautious post-crisis business environment, so it’s hard to see this deal being consummated at reckless cost. 'No deal' may disappoint those looking for a revival of the M&A market, but that may be better than a bad deal.”

Now, following Kraft’s disappointing projections announced late Tuesday, Martin Deboo at Investec Securities said: “We now think Kraft will be willing to pay only 800p, and the probability of a successful bid falls accordingly.”

Analysts at J.P. Morgan & Co are notably undecided, with U.K. based Pablo Zuanic, who covers Cadbury, voicing a “growing belief” that Kraft will walk away as he cut his price target on Cadbury by 5% to 780 pence. But colleagues Terry Bivens and Jason English, which cover Kraft for the bank from New York, said: “We continue to believe that Kraft will make a formal offer by the deadline.”

We now assume a lower price on lack of competing bids, lower synergy assumptions, and our growing belief Kraft could walk away (and come back only a year later when investors would have a better sense of [Cadbury's] Vision into Action’s true potential). We doubt Kraft will go over 780p. Such an offer with only a 30% stock component may be enough.- JPMorgan

Kraft CEO Irene Rosenfeld’s cool comment: “We remain interested but will maintain a disciplined approach,” adds to the likelihood that Kraft won’t bet the farm on Cadbury.