Cadbury: Kraft Foods’ $19 billion acquisition of Cadbury creates an unstable dynamic in the global confectionery sector. Almost one third of the market will be split equally between the enlarged Kraft and US rival Mars. That raises some tricky strategic questions for the industry's smaller players like Italy’s Ferrero, Hershey of the US and even for Switzerland’s Nestle .
The projected savings from the Cadbury deal show the scope for M&A synergies in this sector. Kraft's statement puts these at $675 million annually, or 6.9 per cent of Cadbury's annual sales last year. For investors, that's $3.76 billion of value, if taxed at 25 per cent, capitalised at 10 times and after deducing seemingly high one-off costs of $1.3 billion. This initial assessment is probably conservative, reflecting little of the value of Cadbury management's last-minute co-operation.
Kraft’s greater efficiency will now make it much more of a threat. Hershey and Ferrero, each with 4.5 per cent of the market, knew that. They both sniffed around Cadbury. Neither needs to respond to the deal immediately. Hershey is still growing and has dominant positions in certain markets. Ferrero, being family controlled, has the luxury of being a private company free of the pressure of institutional shareholders.
But over the long-term, they face being pinched by Kraft and Mars. What’s more, retailers are increasingly squeezing suppliers. Only confectioners with scale will be able to push back.
As for Nestle, it needs to decide what it really wants to be in this sector. Its strategy is focused on health and so-called “wellness”, a theme that sits uneasily with sweet snacks bought on impulse. The cash-rich group chose not to bid for Cadbury — in spite of being capable of leading a break-up of the UK company in partnership with Hershey. Hereon, it may choose to be a seller rather than a buyer.
That leaves European tiddlers like Lindt & Sprungli and Perfetti van Melle — both attractive targets for buyers from Kraft down. Kraft itself now has some cleaning up to do. With Cadbury in the bag, it is likely to divest some of its low-growth assets as markets improve. The Cadbury deal should be seen as a further impetus to dealmaking in this ever consolidating sector.
