Cadbury: Nestle has done Kraft Foods a small favour in the pursuit of Cadbury. The Swiss food group is buying Kraft's US pizza business for $3.7 billion in cash, boosting Kraft’s firepower in its assault on the UK confectioner. Nestle is also ruling itself out as a competing bidder for Cadbury. These moves are a boost to Kraft’s bid — but only in combination with more effort from Kraft itself.
The financial benefit is limited. Kraft says the net proceeds of the sale could boost the cash portion of its bid — but not the offer’s overall value — by 60 pence. At Kraft’s closing share price on January 4, that implies a 742 pence-a-share offer including up to 360 pence, or 48 per cent, in cash.
Moreover, the disposal is quite an inefficient transaction for Kraft. It generates only $1.32 billion for the cash sweetener. The other $2.38 billion of the proceeds are for tax and to maintain its credit rating. About $1 billion should be needed for the latter purpose, given that it will be selling a business with $297 million of EBITDA and assuming it needs a 3.5 times EBITDA multiple to stay investment grade. That means the tax bill looks pretty chunky.
The tactical boost from Nestle’s confirmation that it will not bid for Cadbury is also small. The market already viewed Nestle’s intervention as unlikely given its anti-trust obstacles. Cadbury shares dipped only 1.8 per cent, to 790.5 pence, on the news. That is still 6.5 per cent above Kraft's offer.
Kraft still faces two major obstacles. First, it must raise its bid to beat Cadbury's market price.
Then it will need to throw in more cash to maintain the cash component at about 50 per cent. Existing bank facilities could take the cash component up another 100 pence to 460 pence and push the bid above the symbolic 800 pence-a-share level. That would put real pressure on Cadbury's board to enter talks.
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For now, Kraft's decision to take all the time allowed under UK takeover rules has not tempted rival bidders out of the woodwork.
But the moment will soon come when Kraft needs to give Cadbury shareholders a real choice between a tempting bid or a standalone future.
