We’ve all heard of the original RJR Nabisco KKR nexus, but it is still useful to remind people like us about runaway greed and when premiums on price become untenable. However in the fresh bid for Kraft from Cadbury’s, the opinion that the bid premium should only bedependent on cost savings is a little behind the times. We all know Kraft and Irene Rosenfeld wouldn’t want to pay extra, but the Nabisco acquirer has one addl piece of knowledge, which they are going to find to be costly in the negotiated / hostile bid for Carr’s Cadbury empire. Of the $2.7 billion sales in HY2009 (details here) over 40% is from growth markets and there sales growth would be easily in excess of 30%, with double digit margins, that have kept CBY’s 2008 net margins at 13% Thus the premium from the cost savings would just be GBP 736 million ($1.2 billion) , while the sales premium would be the additional 12% annual sales ( even if you assume the same for only 3-4 years, it amounts to another $2.4 billion from my estimates and so the price premium can easily cross 700 pence taking the price to well above 1260 pence.
This is of course rough estimates, but it is definitely worth someone like KKR to come in and keep the right management on top.
The Cadbury Balance sheet is entirely made of cash retained earnings making 99% of the Equity of $3 billion and it’s sales of $5.5 billion each year. There is no operating interest cost in its income statements.
KFT on the other hand has been aggressively pursuing margin improvement strategies and is largely a domestic play