Kraft Foods could offload some non-snacks brands in order to fund a fresh bid for UK confectioner Cadbury, one US analyst claimed today (8 September).
The US food giant, which owns brands including Dairylea cheese and Oscar Mayer meats, has already had one GBP10.2bn (US$16.82bn) cash-and-share offer rejected by the Cadbury board and industry watchers expect the Toblerone and Milka chocolate maker to table a higher offer.
While a second offer from Kraft appears probable, questions have been asked over the company’s ability to fund a higher bid.
Alexia Howard, an analyst at US investment bank Sanford Bernstein, cautioned that Kraft would have to be wary of returning to the Cadbury board with too high an offer – but said a second bid could be funded by disposals.
“Kraft will need to tread carefully to avoid overpaying,” she wrote in a note to clients. Cadbury’s share price soared yesterday by almost 40% to 783p and Howard estimated that a second Kraft offer at that level would value Cadbury at GBP10.64bn – plus GBP1.28bn in the UK firm’s debt.
“If Kraft were to increase the bid by 15% to circa 850p, this would imply a deal value of GBP12.8bn. Once the level gets much above this, the overall deal attractiveness starts to taper off, especially when the $1.2bn cash costs of integration are factored in,” Howard said.
Howard argued that Kraft could offload some assets to help fund a second offer – and pinpointed Oscar Mayer meats as a potential candidate.
“It is possible that Kraft could shed some non-snacks businesses to help to fund the deal,” she said. “While it appears that Kraft could potentially complete this deal based on the current portfolio, we wonder whether such a move to become the global leader in the sweet snacks area might catalyse the sale of some of the company’s lower margin domestic businesses.
Not all analysts, however, believe that Kraft would look to sell off some of its non-snacks businesses to raise cash.
Erin Swanson from investment house Morningstar told just-food that she believed Kraft’s initial offer for Cadbury was a fair one – and added that the company’s recent restructuring meant it already had a lean portfolio.
“Kraft’s initial offer is already at a premium to what we believe is a fair value for Cadbury,” Swanson argued.
She added: “I’m not expecting Kraft to sell off any assets. Kraft has pruned its portfolio in recent years and got rid of its low-margin, less profitable assets.”
Stifel Nicolaus analyst Daniel Stephen agreed. “We do not anticipate any asset sales,” Stephen told just-food.
“We have to sit back and wait to see how Kraft moves from here – raise the offer or somehow convince Cadbury shareholders that this is the “best” offer put forth. We suspect this will require a higher bid and the recent trading for Cadbury (up over 800 pence) suggests investors believe, like we do, Kraft has to come back with a higher offer, or that this offer will simply invite other companies to bid on Cadbury as well,” the analysts wrote.
Speculation in the US is circulating that chocolate giant Hershey is preparing a counter bid for Cadbury, although officials at Hershey and controlling shareholder The Hershey Trust could not be reached for immediate comment.
Swiss food giant Nestlé has also remained coy over reports it may make its own bid for Cadbury or team up with Hershey.
Paul Bulcke, Nestlé CEO, said the bid was “good timing” and that the rumours Nestlé would make a counter-bid were “getting firmer”.
“We are not going to comment on these rumours,” Bulcke told reporters. “I’m not going to comment on possible reactions or expectations from Nestlé’s side, it can only add to speculation that we don’t want to have for the time being.”
Kraft chairman and CEO Irene Rosenfeld has so far refused to be drawn on whether her company would return with a second bid. However, the Kraft boss has said she wants to “engage” on a “constructive basis” with the Cadbury board.
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