Hershey-Ferrero/Cadbury: The spectre of a Cadbury break-up has been hovering since Kraft Foods made a tilt at the UK confectioner in September. Now Hershey, Kraft’s US rival, and Ferrero, the Italian chocolate group, are working on this very project, according to the Wall Street Journal. The preparations betray the industry’s nervousness about the competitive threat that a combined Kraft/Cadbury would pose. But the odds do not favour Hershey and Ferrero as victors in any bidding war.
It is not clear how the Cadbury business would be carved up between this particular pair. The conventional industry thinking, that Hershey would take the fast-growing gum business leaving Ferrero with chocolate, is not necessarily right. Cadbury could also be carved up on geographical lines. Either way, the complexities of executing a break-up would justify a discount on the potential synergies, which may therefore not be a great as the $625 million annual benefits that Kraft has forecast for its proposal. That’s the first disadvantage.
The second problem is financing. A bid at 5 per cent above the current share price would cost £11.3 billion ($19 billion). Hershey has little debt, but the bidders may have to gear up substantially. Hershey might have to raise equity too.
If the pair get as far as making an offer, that would of course put pressure on Kraft to raise its own cash-and-shares bid. But if Hershey and Ferrero do not follow through, after their project has been leaked, that will only play to Kraft’s tactical advantage by demonstrating how few alternative bidders there really are.
Hershey and Ferrero’s best chance of success is if Kraft’s own investors stop it increasing its current lowball bid. But the duo's interest is revealing nonetheless. A combination of Cadbury and Kraft would leave food producers dominated by three giant players —the others being Mars and Nestle.
It is hard to see how the smaller players, such as Hershey, Ferrero and Switzerland's Lindt, could really compete with the lower-cost production and massive distribution capabilities of these goliaths. The Cadbury auction may be their last opportunity to be a buyer — before they all become sellers.