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September 10, 2009

US/UK: Kraft “in talks to raise Cadbury bid”

US food giant Kraft Foods is in talks with bankers to set up a debt facility to enable it to offer Cadbury shareholders more cash, according to reports

US food giant Kraft Foods is in talks with bankers to set up a debt facility to enable it to offer Cadbury shareholders more cash, according to reports.

Kraft is said to be in talks with investment banking advisers Deutsche and Citigroup to set up a debt facility of about GBP5bn (US$8.3bn), which could enable it to offer the UK confectionery giant’s shareholders more cash.

The Dairylea cheese maker had its GBP10.2bn cash-and-share offer rejected by the Cadbury board on Monday (7 September).

The Cadbury board said the proposal “fundamentally undervalues the group and its prospects”.

Legal & General, Cadbury’s biggest shareholder, supported the rejection saying that Kraft’s bid “materially understates” the value in Cadbury.

“We have welcomed the management moves to improve shareholder returns, and think these initiatives have much further to run,” said Mark Burgess on behalf of Legal & General. “We also note the valuations of other recent food transactions. As such we therefore believe this approach materially undervalues Cadbury and support the management in rejecting it”.

Kraft is now understood to be working “at speed” to arrange bank financing in order for it to put in a higher bid, according to The Guardian.

Andrew Wood, research analyst at Sanford Bernstein, believes Kraft will need to increase its offer up to GBP9.00 a share in order to stand “a good chance” of getting the deal done.

“After so forcefully explaining the (genuine) benefits of the deal over the last couple of days, Kraft’s CEO clearly wants to complete the deal, and we would be very surprised if Kraft had not kept more ammunition up its sleeve, and did not have the balance sheet flexibility to increase its bid,” Wood said.

He added: “We consider that GBP9.00 would be a fair and reasonable price for both sides in this “war”. Cadbury shareholders would be getting a massive upside to where the stock was trading just last week …although they would be accepting less than what Cadbury is truly worth. While Kraft would be paying 20% more than its initial bid for Cadbury…it would be getting a “once in a lifetime” asset and a “compelling” acquisition.”

Stifel Nicolaus analyst Christopher Growe believes that Kraft has to come back with a higher offer or it will just encourage other companies to bid.

He added that, any increase in offer price would result in less EPS accretion.

“We believe an increase in the offer price would result in Kraft using stock to sweeten the offer (already the deal is about 70% stock/30% cash). We believe this would lead to an increase in the dilution. A 10% increase in the offer price using all stock would result in 5 cents of incremental EPS dilution by our analysis,” Growe said.

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