Nestlé/Hershey/Cadbury: Break-up bids work when several buyers each want different bits of a company, even though some assets are less attractive than others. It is like sharing a chocolate box and finding that someone has a taste for the leftover orange cream. But a break-up of Cadbury, the UK confectioner subject to an unwanted £10.2bn approach from Kraft Foods of the US, might not work out like that. The likely joint bidders - Hershey of the US and Switzerland’s Nestlé – could end up fighting over who gets the Belgian truffle in Cadbury’s portfolio.
The conventional thinking goes like this. Hershey, valued at $8.8bn, could not afford to buy all of Cadbury, which has a market capitalisation twice as large. Antitrust considerations would block Nestlé from owning Cadbury’s chocolate assets – both are leaders in almost all the UK group’s important markets. So Nestlé would take only Cadbury’s trophy chewing-gum business, leaving Hershey to buy the chocolate side.
The total synergies available from the two deals might not quite match those available in any transaction with Kraft. Hershey lacks global reach, and the overall fiddliness of a break-up makes it more risky. But a higher proportion – perhaps all – of the joint bid could be in cash. That would be more appealing to Cadbury shareholders than the mix of cash and non-sterling paper in Kraft's £10.2bn approach.
It sounds easy. But how solid is the assumption that Hershey would play the role of sponge to absorb what Nestlé doesn’t want? Hershey may well be as keen as Nestlé to nab Cadbury’s fast-growing chewing-gum business. After all, Mars, the US chocolate group, paid a huge multiple of earnings to buy gum giant Wrigley last year.
Nestlé may need to offer Hershey an incentive for missing out of the plum assets. One carrot could be for Nestlé to make a generous cash offer to buy Hershey’s US Kit Kat business. Nestlé owns Kit Kat everywhere else and must be keen to own the brand globally. This side deal would then give Hershey cash funds to buy Cadbury’s chocolate businesses. A complicated three-way transaction like this would be incredibly tricky to negotiate. So both companies might first think about ways of getting a deal done without each other. Hershey could partner with a sovereign wealth fund to launch a full bid for Cadbury. Nestlé may seek alernative buyers for the chocolate assets it couldn't keep. Still, if both groups fail in such solo endeavours, they may have little choice but to pair up.