Kraft Said to Argue Cadbury Bid Is Actually Worth 800 Pence

Kraft Said to Argue Cadbury Bid Is Actually Worth 800 Pence


Dec. 3 (Bloomberg) -- Kraft Foods Inc., the U.S. food maker attempting a hostile takeover of Cadbury Plc, is expected to argue its cash-and-stock offer has a potential value of about 800 pence a share, two people familiar with the situation said.

Kraft may tell Cadbury investors its bid will be worth about 12 percent more than the current 714 pence value when its shares return to the historic average, said the people, who declined to be identified because the plan is confidential. The 800 pence figure is based on Kraft’s five-year average share- price-to-earnings ratio and gives the offer a value of 11 billion pounds ($18.3 billion).

The Northfield, Illinois-based company, which has said it won’t overpay for the Dairy Milk chocolate maker, wants to convince investors that the value of the Kraft stock they get will be worth more in time as the shares recover from a March record low. Warren Buffett, Kraft’s largest shareholder, has said the stock is “worth more money than it’s selling for.”

“The stock is undervalued on a fundamental basis,” Chris Growe, an analyst at Stifel Nicolaus & Co. in St. Louis, said in an interview. “There is an important underlying growth story and a much improved margin structure,” at Kraft, added Growe, who has a “hold” rating on the shares.

Kraft may outline this argument in offer documents due by Dec. 7, the people said.

Price-to-Earnings Ratio

“We will certainly be communicating to Cadbury shareholders through our offer documents,” Mike Mitchell, a Kraft spokesman, said yesterday in an e-mail. He declined to elaborate on the company’s strategy.

Kraft’s price-to-earnings ratio has averaged 17.5 during the past five years, based on reported results, according to data compiled by Bloomberg. Its valuation using analysts’ average estimate for 2010 profit is 12.3, compared with 14.1 for the Standard & Poor’s 500 Index and 13.3 on the Dow Jones Industrial Average.

Kraft fell to a record of $21 in March as the S&P dropped to lows that month after the recession worsened and consumers cut back on household spending. The shares rose 11 cents to $26.61 Dec. 2 in New York.

Analysts at Davenport & Co. LCC in Richmond, Virginia, have a share-price forecast of $37 on Kraft’s shares, citing improving profitability from “brand building investments.”

‘Begin With an 8’

“I don’t think Cadbury shareholders would buy” the undervaluation argument, Edward Aaron, a Denver-based analyst with RBC Capital Markets, said in a telephone interview. “If they were really worth more, the market would value them higher.” He rates the shares “sector perform.”

Cadbury investors including Mario Gabelli, the chairman and chief executive officer of Gamco Investors Inc., have said Kraft needs to improve its offer by 10 percent to 15 percent to win over shareholders. Kevin Dreyer, an analyst at Gamco in Rye, New York, said that means any offer “will need to begin with an 8 to get Cadbury into negotiations.”

Roger Carr, chairman of London-based Cadbury, called Kraft’s bid “derisory” in a Nov. 9 statement advising shareholders to reject the offer. Cadbury earlier said the approach was an “unappealing prospect” from a “low-growth conglomerate.”

Trevor Datson, a spokesman for Cadbury, declined to comment on whether the company’s board will consider the potential future value of Kraft’s shares. Cadbury stock has traded above the value of the unsolicited bid since it was made public on Sept. 7, and fell 1 pence to 805 pence in London trading.

Kraft’s bid for Cadbury offers 300 pence and 0.2589 Kraft share for each Cadbury share.

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