Kraft: Sitting Tight on Takeover Offer Despite Cadbury Bluster

Includes: CBY, HSY, MDLZ
by: Research Recap

Despite the vigor of Cadbury (CBY) management’s rejection of Kraft’s (KFT) takeover offer, it has not moved the needle much on the deal. While Cadbury alluded to interest from other potential buyers or merger partners, such as Hershey (NYSE:HSY) and Ferrero, Kraft is under no immediate pressure to raise its offer unless and until something concrete emerges.

Cadbury is trading about 8% above the offer price, a premium that could easily be erased (or expanded) by a change in Kraft’s stock price and/or currency fluctuations. Indeed, Kraft today stuck to its guns, suggesting it had no intention of raising its bid.

Andrew Wood, an analyst at Bernstein Research said: ‘We consider that the increased medium-term guidance plays directly to the ‘true’ value of Cadbury, which should incentivise-Cadbury shareholders to hold out for a higher bid.’

But Charles Stanley analyst Jeremy Batstone-Carr said market reaction to Kraft’s response was muted because it essentially altered little in the takeover battle.
“Whilst Kraft may question the credibility of Cadbury’s defence strategy, investors could raise the same concerns regarding Kraft’s recent sub-sector operating performance and its international expansion-integration plans,” he said.

Lex notes that, based on valuations of its peer group, an earnings multiple of 16 times would suggest a standalone valuation in the region of 700p per share, before including any takeover premium. “Even in the absence of a competing bid, it now seems inevitable that Kraft must move its offer closer to the 850p per share suggested by past food deal valuations to succeed.”

Batstone-Carr is recommending investors reduce Cadbury shareholdings because Kraft may be unable to justify an offer price around the 850 pence many analysts believe is necessary to win Cadbury.

Lacking a credible alternative bidder, Kraft can sit tight until after the holidays to decide whether to reconsider its bid.