Cadbury tells Kraft it must up its offer
CADBURY yesterday urged shareholders not to let US food group Kraft “steal your company,” and issued upbeat trading figures to back its case.
The British chocolate maker, which has spent the last four months fighting off Kraft’s £10.8bn hostile cash and share bid, accused the US food giant of dramatically undervaluing the company.
In a last-ditch attempt to fight off the American giant, it revealed that revenues grew by six per cent in the second-half of 2009 and said it expects its full-year dividend to grow 10 per cent on last year to 18p. The firm said that its results had been boosted by strong growth in the fourth quarter of 2009 and by cost savings.
Cadbury, whose brands include Dentyne chewing gum and Dairy Milk chocolate, said revenue would grow between five to seven per cent in 2010, while margins would improve between 16 and 18 per cent by 2013.
Appealing to shareholders Cadbury chairman Roger Carr insisted that Kraft’s bid undervalued Cadbury against comparable deals in the industry and described it as “derisory.”
“Kraft’s offer is even more unattractive today than it was when Kraft made its formal offer in December. Our 2009 performance is ahead of our previously upgraded expectations and we have excellent momentum going into 2010,” he added.
However, Kraft noted Cadbury did not provide a margin forecast for 2010, and dismissed the chocolate maker’s final defence as underwhelming, saying it added little new. “We continue to believe the certainty and upside potential provided by our offer remains the best option for Cadbury’s shareholders,” it said.
Kraft has until 19 January to change its bid while Cadbury shareholders have until 2 February to decide.
Kraft’s £10.8bn cash and share bid is currently worth 762p a share compared to Cadbury’s closing share price of 777p. Analysts say a winning bid needs to be 800p or above.
Eight is the magic number for Kraft
NOW that Ferrero has pulled out of talks with Hershey on a joint bid for Cadbury, shareholders will be understandably jittery. That doesn’t mean they should accept Kraft’s 764p-a-share offer – the British confectioner is worth far more than that.
Kraft’s £10.8bn offer values Cadbury at just 12 times 2009 ebitda, but this significantly undercuts recent deals in the sector. When Cadbury bought Adams in 2002, it paid 14.3 times and Mars paid 18.5 times ebitda for Wrigley in 2008.
Even at the low end of the scale, say 14 times ebitda, Kraft would have to up its offer to 911p, or £12.8bn, which is much nearer to Cadbury’s true value. This is the sort of figure shareholders should hold out for, especially if the firm manages to deliver a margin of between 16 and 18 per cent by 2013 as it hopes; that would imply earnings per share growth of 65 per cent over the next four years.
Unfortunately for long-term shareholders, Kraft may still get Cadbury for less, especially with between 15 and 20 per cent of the British confectioner’s stock in the hands of risk arbitrage funds that will sell up regardless of its go-it-alone strategy.
Most analysts agree that Kraft’s final offer, which must be tabled by next Tuesday, needs to be prefixed with an ‘8’. But if Irene Rosenfeld decides to play low-ball and pitches nearer to 800p than 850p, she could still go away empty handed.
Panmure Gordon analyst Graham Jones says that Kraft can probably afford to increase the cash component of its offer by 60p to 420p, now that it has sold its US pizza business to Nestlé for $3.7bn (£2.3bn). If it puts the 420p of cash towards a total bid of 840p, that would also allow it to reduce the amount of Kraft shares it is offering per Cadbury share from 0.2589 to 0.2348. Warren Buffett, who feels that Kraft stock is an expensive currency for acquisitions, could then be persuaded to back the bid.
If Rosenfeld pitches her offer much lower, she could end up with Creme Egg on her face. david.crow@cityam.com