…It is extremely rare for strong brands such as Cadbury to come up for sale and its sector peers will realise that this is a once in a lifetime opportunity to acquire some of the strongest brands in the sector and they will be reluctant to let the opportunity pass them by.
A glance at the above chart of the FTSE 100 highlights the best performing three months in its quarter century history.
The blue chips have gained almost 21% since the end of June, which outpaces any other quarterly rise since the index was established in 1984. The rally has been fuelled through a combination of government intervention and an improving economic outlook, which has resulted in a gain of almost 50% from the March lows.
However, the sustainability of such an extensive correction is questionable and fears about the bandwagon rally coming to an abrupt end have increased in recent days, as mixed economic data and US corporate earnings season will put recently inflated equity valuations to the test.
US economic data has largely come in below analysts expectations this week, with consumer confidence, Chicago manufacturing activity and an ADP employment report all disappointing the market. It also heightens fears that the consumer is likely to be a laggard in the economy, which could create a slow protracted recovery ahead.
Growing signs of fatigue among investors is supported by the faltering technical analysis. The FTSE is clearly struggling to break through 5200 and the bullish channel that has been in place since early July appears to have been breached.
The relative strength index (RSI) is also well off its highs and has posted a fresh short term low, which suggests the inherent momentum experienced recently is faltering.
A close below 5100 suggests that the trend has broken and could initiate a further move lower towards 4820. However, a bounce back above resistance at 5200 would indicate that the bullish trend looks set to continue.
In summary, I am growing increasingly skeptical about the sustainability of the rally. A combination of possible end of quarter “window dressing” combined with faltering economic data, technical analysis and the possibility of disappointing third quarter results could send global equities lower over coming weeks.
The last couple of weeks have been surrounded by various bid and merger activity and confectioner Cadbury (Epic: CBRY), which owns brands such as Flake, Dairy Milk, Milk Tray, Jelly Babies and Curly Wurly is the subject of this week’s article.
In 2007 the merger of Mars and Wrigley kicked off what many believed would be a wave of consolidation within the confectionary industry. In September, US confectioner Kraft, whose rival brands include Toblerone, Oreo and Terry’s has offered £10.2 billion for the group, which values Cadbury at 745p, although a fall in Kraft’s share price since the announcement means it is now closer to 725p.
Cadbury immediately rejected the approach and the UK Panel on Takeovers and Mergers (NYSEARCA:PTM) has increased the intensity surrounding the deal by ordering Kraft to make a formal bid for Cadbury by the 9th of November or go away for six months.
This is likely to trigger a counterbid from sector peers and the likes of Nestle and Hershey are rumoured to be exploring the possibility of a deal.
Hershey, which contemplated entering the UK market in the early 1980’s would be keen to acquire Cadbury’s chocolate activities. The two companies’ already share a close familiarity as Hershey holds the license to make and sell Cadbury chocolate brands in the US. However, an approach for the whole group is unlikely as Hershey is too small to support the debt load needed to make a competing offer, without issuing shares to cover the difference.
Nestle would also love to gobble up Cadbury’s gum brands, having previously failed in the auction for Adams in 2001, although antitrust issues loom large.
When Mars swallowed Wrigley it paid an implied PE ratio of 19x EBITDA and if Cadbury’s gum business, which includes Trident is valued at that 19x EBITDA multiple and their chocolate arm is placed on a 13x multiple, it would imply an overall valuation for Cadbury in the region of £11 to £12 a share.
It is extremely rare for strong brands such as Cadbury to come up for sale and its sector peers will realise that this is a once in a lifetime opportunity to acquire some of the strongest brands in the sector and they will be reluctant to let the opportunity pass them by.
As can be seen from the above chart of Cadbury the shares spent much of the last 12 months trading between £5 and £6. Following the recent approach by Kraft the shares have jumped around 35% and appear to have settled around the £8 level.
Given the unlikelihood of all parties walking away from this rare deal I am keen to buy Cadbury at current levels. A tight stop loss at 770p makes this an extremely attractive trade on a low risk/reward basis and I am keen to take advantage of further probable approaches, which I believe will eventually sell for a value of around £8.50 to £9.50.
At the time of writing the share price is 803.5p and I believe there is further upside to come. Near term targets are seen at 848p, 864.5p and 895p, with a stop loss marginally below the recent low at 770p.
This report was written by Mark Allen – Head of derivatives at Simple Investments Stockbrokers. The writer does not hold a position in Cadbury. The material in this report has come from Simply Charts and Cadbury’s corporate website.