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November 10, 2009

Kraft’s pursuit of Cadbury – what the analysts now say

Two months after Kraft Foods made its first approach to Cadbury over a potential takeover of the UK confectioner and the US food giant's proposed bid has not changed. If anything, its now formal offer has dropped in value due to the fall in Kraft's share price. Here is how leading analysts in the sector see the state of play - with suggestions that the saga could last well into the New Year.

Two months after Kraft Foods made its first approach to Cadbury over a potential takeover of the UK confectioner and the US food giant’s proposed bid has not changed. If anything, its now formal offer has dropped in value due to the fall in Kraft’s share price. Here is how leading analysts in the sector see the state of play – with suggestions that the saga could last well into the New Year.


“[Kraft’s formal bid] is the same terms as its original proposed bid but in reality it is 717p, or 4% lower. Cadbury’s board rejected the bid as ‘derisory’ and we agree. It is 11.1x 2009 EBITDA, and 9.4x 2010 EBITDA. Kraft paid 13.6x for Danone’s low-growth biscuits business in 2007 and average global food deals in the last decade have been at 16.2x. The offer hugely under-values Cadbury on all key metrics” – Andrew Wood, Sanford C Bernstein.


“We recommend that shareholders reject the existing Kraft offer [but] we believe that Kraft now has the financial resources to improve the cash component of its offer from GBP3 to GBP4 (ie a facility of GBP5.5bn agreed with its banks) – which we believe would get the deal done. In the absence of a rival bidder emerging, Cadbury has a weak hand and we assume the deal will be concluded at 13x EV/EBITDA 2009E (rather than 14x previously)” – Jon Cox, Kepler Capital Markets.


“This saga is far from over, in our view. We believe this offer indicates that Kraft is being prudent in the pursuit of Cadbury. [However], while its not essential, strategically, we believe the acquisition of Cadbury makes sense for Kraft, as it could gain a larger foothold in the attractive confectionery industry, which is higher growth and higher margin than other categories in the packaged-foods space.” – Erin Swanson, Morningstar.


“We believe that [Cadbury’s] chances of remaining independent has been strengthened. The Kraft bid values Cadbury substantially in line with its peers on our 2010 forecasts. Management are likely to release Q4/FY09 results early further demonstrating the momentum of the turnaround in the underlying business. We now believe this transaction will go to the wire with Kraft’s last chance to raise its bid on 22 January, 2010 and completion likely to be dragged on until 5 February, 2010 by which time Kraft would have to have secured a 50% majority” – Simon Marshall-Lockyer, Jefferies International.

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