Cadbury May Fetch $21 Billion If Nestle, Hershey Trump Kraft

Cadbury May Fetch $21 Billion If Nestle, Hershey Trump Kraft


Sept. 8 (Bloomberg) -- Cadbury Plc, the confectioner that rejected Kraft Foods Inc.’s bid yesterday, may attract suitors ranging from Nestle SA to Hershey Co. and sell for as much as $21 billion, according to analysts.

The U.K.-based maker of Dairy Milk chocolate and Trident chewing gum spurned Kraft’s $16.7 billion bid as “fundamentally inadequate” and its shares surged past the offer price, suggesting investors are expecting a sweetened proposal from the Northfield, Illinois-based company or a rival offer.

Nestle, the only food company larger than Kraft, may be tempted to thwart its smaller rival’s ambitions to bulk up, and team with Hershey to break up Cadbury, according to Evolution Securities, Panmure Gordon and Kepler Capital Markets. Other potential predators include Kellogg Inc. and PepsiCo Inc. Kraft said it would keep trying to persuade Cadbury to start talks.

“We’re moving towards the end game of consolidation in confectionery,” said Simon Marshall-Lockyer, an analyst at Jefferies International in London, who has covered Nestle since at least 2001. “The stakes are very high.”

Cadbury declined to comment on whether it had received interest from any other companies.

The biggest transaction in the candy business occurred last year, when Mars Inc., the privately held maker of M&Ms, bought Wm. Wrigley Jr Co. to surpass Cadbury as the world’s largest confectioner. Cadbury and Kraft’s combined sales in 2008 were $51 billion, about half Nestle’s revenue over the same period.

Combined, Cadbury and Kraft would match Mars’s 15 percent share of the global candy market, according to figures from Euromonitor, a London-based research firm. Nestle trails with a 7.6 percent share of the market.

Nestle’s ‘Bad News’

“This deal, if it were to go ahead, is bad news for Nestle,” said Andy Smith, an analyst at Icap Plc in London. “They’ve got the firepower to counter if they want.”

Kraft’s announcement that it had approached Cadbury came at 7 a.m. in London yesterday, when U.S. markets were closed for Labor Day. Cadbury shares soared 38 percent yesterday, while Kraft declined 1.6 percent in German trading.

Nestle Chief Executive Officer Paul Bulcke yesterday said his company had ruled out major acquisitions in 2009 and 2010, though he declined to comment on Cadbury specifically. Nestle spokesman Robin Tickle declined to comment further.

Press officers for Hershey, Kellogg, PepsiCo and Mars also declined to comment. Hershey is the largest publicly traded U.S. candy maker, while Kellogg is the biggest maker of breakfast cereal in the U.S.

“If there is strategic interest from other players, then this will smoke them out,” Martin Deboo, an analyst at Investec in London, said of Kraft’s approach.

Valuations

Cadbury’s biggest shareholder, Legal & General Investment Management, joined with management in rejecting Kraft, saying it noted “the valuations of other recent food transactions.”

Those recent deals include Mars’ $22.6 billion bid for Wrigley. Andrew Wood, an analyst at Sanford C. Bernstein in New York, valued that transaction at 19.5 times earnings before interest, tax, depreciation and amortization.

Kraft’s current bid values Cadbury at much less, or about 12 times ebitda, according to Bloomberg estimates. Kraft would probably have to pay 14.7 times Ebitda, or $22.7 billion, to be successful, according to the average of 6 analysts surveyed by Bloomberg News. A value of about $21 billion is implied if the debt is excluded, which is how Kraft valued its offer yesterday.

The survey’s multiple was calculated by dividing the so- called enterprise value, equal to the bid price plus Cadbury’s net debt of 1.5 billion pounds ($2.4 billion), by analysts’ estimated ebitda of 973 million pounds over the next 12 months.

Candy Market

Cadbury has 10.3 percent of the world candy market, followed by Nestle’s 7.6 percent and Hershey’s 4.8 percent.

Kraft, whose chocolate brands include Lacta in Brazil and Milka in the U.S., trails those companies with a 4.5 percent stake. If Kraft proposes paying too high a price to catch up, shareholders may revolt.

“Upping the bid means issuing more shares and more dilution,” Sam Davis, chief investment officer at Putnam Investments in London, said on Bloomberg Television yesterday. Kraft’s present bid already leaves its balance sheet “quite stretched,” he said. Putnam doesn’t own Cadbury shares.

Analysts said a rival bid may see Nestle enlist Hershey because the Swiss company would face antitrust concerns in some markets if it acquired Cadbury in its entirety. Combined, Cadbury and Nestle would control more than half the chocolate market in Britain.

Nestle-Hershey Rationale

Hershey could buy some chocolate assets while Nestle keeps Cadbury’s chewing gum, according to Jon Cox, head of food and beverages research at Kepler in Zurich. Cox also said Hershey could raise funds to pay for Cadbury assets by selling its rights to the KitKat brand in the U.S. back to Nestle, rights the Swiss company has long coveted.

As for financing, Nestle may soon have enough cash to pursue Cadbury without issuing new debt or shares. The Swiss food company has an option to sell its stake in contact-lens solution maker Alcon Inc. to Novartis AG as early as January, which would raise about $24 billion at current stock prices.

Hershey, based in the Pennsylvania town of the same name, is controlled by a charitable trust that canceled an auction for the company in 2002. The trust said as recently as last year that it had no plans to give up ownership.

“The trust doesn’t want to lose control, but with a deal, they could finally achieve their ambition of becoming a truly international player,” Panmure analyst Graham Jones said of Hershey teaming up with Nestle.

Jones also said the list of potential Cadbury bidders shouldn’t exclude Pepsi, which gets more sales from snack-food brands such as Doritos than it does for its namesake soft drink. Pepsi isn’t interested in making a bid, according to a Wall Street Journal report that cited people it didn’t identify.

A Kraft takeover of Cadbury would be the largest acquisition made by a U.S. company in Europe this year. The value of food and retail deals plummeted to $62.6 billion in the past 12 months, compared with $208.1 billion in the year-ago period, Bloomberg data show.

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