Kraft’s Cadbury Bid Threatens Both Firms' Credit Profile

Moody’s estimates that Kraft’s (KFT) proposed offer for Cadbury’s (CBY) would push Kraft’s debt-to-EBITDA ratio above 4.0, weakening Kraft’s financial metrics beyond the typical bounds of a Baa2 rating. “Given its large global scale, strong cash flows and broad portfolio of household brands such as Oscar Mayer, Nabisco, and Maxwell House, Kraft’s rating can tolerate higher leverage than most of its peers’ – but within limits,” Moody’s writes in an Issuer Comment.

Beyond the balance-sheet implications of the proposed acquisition, we now question whether Kraft has put itself on a path of external growth through leveraged acquisitions.

“Remember, it was only two years ago that Kraft bought Groupe Danone’s global biscuit business in a USD7.8 billion debt-financed deal, promising to restore its balance sheet over time. However, before fulfilling this promise, Kraft is now seeking to buy Cadbury in another large leveraged transaction twice the size of the previous one.”

“Nevertheless, we do not expect that the proposed transaction would result in a more than one-notch downgrade of Kraft’s rating, i.e. to Baa3. This is based on our expectation that any changes to Kraft’s current bid will be modest, as well as Kraft’s stated intention to hold on to an investment-grade rating. Moreover, Kraft will likely want to avoid the higher capital costs and reduced credit-market access that would accompany a downgrade to speculative grade.”

An added complexity of a downgrade to speculative grade is that, if it came to pass, it could trigger a change of control provisions in two of Cadbury’s notes (see related article “Change of Control’ in Cadbury’s 2014, 2018 Bonds Offer Holders the Best Protection). This would mean Kraft would have to refinance those notes, replacing them with more-costly debt – something the company will likely try to avoid.

Previous ResearchRecap posts on this topic are here.

For the latest analyst comments see Alacra Street Pulse.

Comments

[bobbybutte:]

as a person who has become financially independent SOLELY from allocating capital let me add some things here

I swapped out of KFT last November when there were many other bargains

Having said that i dont think rosenfeld is going to overpay

Buffett wont support her if she does something stupid here

Nov 16 01:37 PM