Cadbury rejects £10.2bn proposal from Kraft Foods

KRAFT FOODS yesterday went public with a £10.2 billion (€11.7 billion) cash and shares offer for Cadbury after the British confectionery brand rejected the US foods group’s proposal.

The proposed offer comprised 300p a share in cash and 0.2589 new Kraft shares for every Cadbury share, valuing the British group at 745p a share in total – a 31 per cent premium to Cadbury’s closing share price last Friday.

However, analysts said the proposal undervalued the UK brand, and shares in Cadbury rose 221½p or 37 per cent to 789½p – far above Kraft’s indicative offer – in afternoon trading in London. Wall Street was closed yesterday for the Labor Day holiday, but Kraft’s Frankfurt-listed shares fell 1.4 per cent to €19.40.

Cadbury formally rejected the proposal yesterday, noting that it was conditional on financing and due diligence, among other things.

“The board is confident in Cadbury’s standalone strategy and growth prospects as a result of its strong brands, unique category and geographic scope and the continued successful delivery of its ‘Vision into Action’ plan. The board believes that the proposal fundamentally undervalues the group and its prospects,” it said in a statement.

Kraft, the world’s second-largest food manufacturer, made its initial proposal on August 28th after a meeting earlier that day between Irene Rosenfeld, Kraft chairman and chief executive, and Roger Carr, chairman of Cadbury.

The industry has struggled in the recession as consumers seek out cheaper foods and limit discretionary spending.

Cadbury suffered an unexpected fall in chewing gum sales in the US in the first quarter, while Kraft was forced to cut profit forecasts for the full year in February on the back of the strengthening dollar and falling margins. In addition, Cadbury is facing increasing competition from Mars, which last year acquired Wrigley, the world’s biggest chewing gum manufacturer.

“This proposed combination is about growth,” Ms Rosenfeld said in a statement. “As we have done, Cadbury has built wonderful brands by focusing on quality, innovation and marketing, but we believe the next stage in Cadbury’s development will be challenging, given the increased importance of scale in the industry.”

Kraft estimated the potential combination could create a company with about $50 billion (€34.9 billion) in revenues, but the move is likely to interest other food manufacturers such as Nestlé of Switzerland and privately held US groups Mars and Hershey.

Speaking on Monday, Peter Bulcke, Nestlé’s chief executive, declined to rule out a possible counter-proposal.

Analysts have long speculated on the possibility of a Kraft-Cadbury combination. In July, Panmure Gordon described Cadbury as “a perfect complement to Kraft’s strengths” and would give it exposure to high-growth gum business and emerging markets. The broker suggested a price of 800p a share for the UK group.

However, Michael Osanloo, Kraft’s executive vice-president for strategy, said the offer of 745p in cash and shares “represented fair value”.

“We think Cadbury can get much more,” said Andrew Wood, an analyst with Sanford C Bernstein in New York. “We think 15-16 times earnings before interest, tax, depreciation and amortisation is a reasonable multiple . . . Mars paid 19.5 times for Wrigley in May 2008, and arguably Cadbury has much more profit growth potential than Wrigley had at that time. “At 15-16 times 2008 ebitda we get £8.55-£9.20, at 15-16 times 2009 ebitda we get £10.00-£10.70.” – (Copyright The Financial Times Limited 2009)