Nestle Said to Mull Cadbury Options, Kraft Challenge

Nestle Said to Mull Cadbury Options, Kraft Challenge

Nov. 22 (Bloomberg) -- Nestle SA is weighing options including a possible bid for Cadbury Plc that would challenge Kraft Foods Inc.’s offer and a potential move by Hershey Co., according to two people with knowledge of the matter.

Nestle is reviewing its options with bankers and may decide against a bid, said the people, who asked not to be identified because the talks are private. Hershey and Ferrero SpA said in statements last week that they were also evaluating options. Ferrero, the maker of Nutella, is unlikely to proceed with an offer, said three people briefed on the situation.

Kraft’s unsolicited 10.4 billion pound ($17 billion) bid for Cadbury would create the largest maker of candy, threatening Nestle’s and Hershey’s market positions. Any bid by Nestle or Hershey may be countered with a higher offer from Kraft, which has never said its current cash-and-stock proposal is final. Nestle may also be constrained by antitrust concerns, as a combination with Cadbury would dominate some chocolate markets.

“How much do they want it?” said Jon Cox, an analyst at Kepler Capital Markets in Zurich, who recommends buying Nestle stock. “If they wanted it, they’d have it, it’s a bit of a slam dunk. Nestle has the financial resources.”

He said there has been speculation Hershey would be Nestle’s partner if needed given the “crown jewel” U.K. Cadbury business would give Nestle almost half of the market, potentially attracting the attention of regulators.

Competition Issues

“Nestle would face a host of market competition authority difficulty with chocolate,” said Thomas Russo, a partner at Lancaster, Pennsylvania-based Gardner Russo & Gardner, which holds Nestle, Cadbury and Kraft shares. “Gum itself may be an additive without any competition authority problems for Nestle because they are not in gum,” he said earlier this month.

Chewing gum accounts for 35 percent of Cadbury’s revenue.

Kraft’s bid values Cadbury at 726 pence a share, based on Nov. 20 closing stock prices. The London-based maker of Creme Eggs and Trident gum, which closed at 801 pence, has traded above the bid price since the offer was made.

“We’re not surprised there are rival bidders considering an offer given the attractiveness of Cadbury’s portfolio,” Erin Swanson, an analyst at Morningstar Inc. in Chicago, said in a telephone interview yesterday. “Nestle hasn’t seemed interested in Cadbury, but from a defensive perspective, they could consider it and anything could happen.”

‘Only Offer’

Northfield, Illinois-based Kraft, the maker of Oreo cookies and processed cheese, rose 20 cents to $27.17 on Nov. 20 on the New York Stock Exchange. Hershey, based in the Pennsylvania town of the same name, added 4 cents to $37.18. It has a market value of $8.47 billion, compared with Kraft’s $40.1 billion.

“We’re the only offer on the table, and we’re confident we’re the best, most logical partner for Cadbury,” Mike Mitchell, a Kraft spokesman, said yesterday by e-mail.

Spokesmen for Hershey and Vevey, Switzerland-based Nestle declined to comment, as did a representative from Cadbury.

Hershey’s controlling trust wants the company to make a $17 billion offer, the Wall Street Journal reported Nov. 20.

In one possible scenario, Hershey would contribute at least $10 billion in cash and $2 billion in new shares, the Journal reported. Former Goldman Sachs Group Inc. banker Byron Trott is talking to investors about supplying an additional $3 billion to $5 billion in cash to help with the purchase, the newspaper said. The trust would sell assets, though it would try to maintain control of Hershey, the Journal said.

Nestle has an option to sell its majority stake in eye-care company Alcon Inc. to Novartis AG as early as January, and could use the proceeds, which may total more than $20 billion, to make acquisitions.

‘Out of the Water’

“That’s enough money to get you in the game for sure,” Brian Krawez, a senior research analyst at Scharf Investments in Santa Cruz, California, said in an interview earlier this month. “I think they could blow Kraft out of the water.” Krawez, who holds Cadbury and Nestle shares, has no Kraft stock.

Ferrero, the closely held candy maker based in Pino Torinese, Italy, is meeting in the coming days to make a decision on Cadbury, a person briefed on the matter said.

The only way Hershey, which makes and sells Cadbury brands in the U.S., could finance a bid is if the trust decided to move to a single-class share structure, relinquishing its control and making it easier to sell new stock, said Pablo Zuanic, an analyst at JPMorgan Chase & Co. in London.

The 104-year-old Hershey Trust, which funds a Pennsylvania school, canceled an auction for Hershey in 2002. It rejected a joint Cadbury-Nestle bid and another offer from Wm. Wrigley Jr. Co. following opposition in the company’s home state.

“The typical argument that gets companies into trouble is that this is a deal you cannot afford not to do,” Russo said. “Nestle generally has been able to steer clear of such entreaties and I suspect they will be again here. If they do act, it will be because they recognize an opportunity that’s core and strategic and properly valued.”

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