A Slightly Sweetened Deal Should Be Good for Cadbury

Kraft (KFT) confirmed the terms of its offer: 300p [$5.00 per share] in cash and 0,2589 new Kraft shares which values Cadbury at £9.8bn [$16.33 billion] (717p [$12] per share). Cadbury just rejected a “derisory offer”.

Based on our revised 2009 estimates following Q3 update, Kraft’s offer values Cadbury 11xEBITDA, which is below the 14-15x range seen in previous deals.

We feel that such multiples are not valid anymore for two reasons: the environment has become much tougher in the consumer field and, as expected (cf our previous comments), Kraft seems to be the only suitor. In addition, the offer assumes synergies of $625m (6% of Cadbury sales), which seem realistic and in line with previous MA deals in the consumer sector.

As result, we feel that a valuation based on a 12-13x range (p790 [$13.16]-860 [$14.33] per share) should be a good deal for Cadbury shareholders.

Stock price: p760 ($12.65)

Conclusion: We think that Kraft could slightly improve its offer but we reiterate our view that Cadbury will find it hard to refuse an offer around p790-860.

Comments

[maz:]

Hi Veronique,

I follow Cadbury closely and think that absent a second bidder you have hit the nail on the head. In my opinion the current bid will not succeed for two reasons; the most important is that at 717p per share it is simply too low; the second is the proportion of Kraft shares at nearly 60% of the bid. Warren Buffett may be correct that it is a full value because Kraft shares are undervalued but Cadbury investors don't want stodgy old Kraft shares. Trouble for Kraft is they don't have enough cash or can't raise more debt on reasonable terms after the Danone deal.

Even 800p and 50/50 cash/shares may not get it done in a hostile bid but at least that's $53.50 per ADS and may get some to nibble. Media reports of top Cadbury investors wanting 900p ($60 per ADS) "before they get their calculators out" are probably just beating the bushes to drum up higher bids. I also think the reported Sanford Bernstein estimate of 860p ($57 per ADS) and 1020p ($68 per ADS) based on the Mars/Wrigley deal numbers are too optimistic for the reasons you state - the market has changed and Cadbury is not Wrigley!

On the topic of another bidder it could be that one will emerge now that Kraft has finally made a formal offer. I base this on the idea that potential suitors did not have to rush in before Kraft made their bid formal. Even now I think that we are only in the early stages of a long process.

It will be interesting following along.

Discl; I do not own Kraft or Cadbury shares

Nov 10 01:11 PM