Hershey is stepping up efforts to prepare a bid for Cadbury and plans to make a decision after Kraft Foods's final offer for the UK chocolate maker, according to people with knowledge of the matter.
Hershey has been in talks with credit-ratings companies in recent days about how to structure a
bid without imperiling its investment-grade debt rating, said the people, who declined to be identified because the talks are private. It's also been drafting commitment letters with its lenders, JPMorgan Chase & Co and Bank of America, to secure a multi-billion-dollar loan package, the people said.
"This is the last major target in global confectionery - at a minimum Hershey want to keep Kraft honest by forcing a higher bid," said Andy Smith, head of equity research at Icap in London.
"Hershey understand that if Kraft get Cadbury at a bargain basement price it will increase the competitive pressure on them."
Board members from Cadbury, led by chief executive Todd Stitzer, and Hershey, headed by chief executive David West, have discussed a combination, said the people. Hershey recently reaffirmed its interest, Cadbury chairman Roger Carr said yesterday on a conference call.
An offer would challenge Kraft's £10.9 billion hostile bid and would involve swallowing a company more than twice Hershey's size. Standard & Poor's has an A rating on Hershey's debt, or five levels above junk, with a negative outlook.
Cadbury fell 3.5 pence, or 0.4 per cent, to 795.5 pence in London trading as of 9.05am, paring two days of gains after reports that Hershey was preparing a solo bid. Kraft's cash-and-stock offer is currently worth around 762 pence per share.
Cadbury spokesman Trevor Datson declined to comment on whether the two chief executives have spoken.
"Hershey coming in as a standalone bidder is fraught with difficulties given the size of the cash required to compete with Kraft," said Mr Smith. A bid "would almost certainly require a massive rights issue," he added.
Kraft has until January 19th under UK law to raise its offer, and Hershey may conclude that a higher Kraft bid puts the maker of Dairy Milk chocolate and Creme Eggs out of its reach, the people said.
Hershey will have another four days, until January 23rd, to decide whether to enter the fray. In addition to financing the bid through loans and new Hershey shares, the company is also trying to raise cash by selling equity stakes to new investors, the people said.
Hershey, based in the Pennsylvania town of the same name, had been locked in talks for months over how to respond to Kraft's offer, first made public in September. While board members weren't able to agree on whether to move forward with a bid as recently as this month, they made progress in resolving their differences in the past two weeks, the people said.
The Hershey Trust holds about 80 per cent of Hershey's voting power and 31 per cent of common shares.
Hershey, which distributes Cadbury products in the US, rose 35 cents to $36.96 yesterday in New York Stock Exchange composite trading. Kraft, based in Northfield, Illinois, fell 11 cents to $29.12 in New York.
Hershey has been using former Goldman Sachs Group banker Byron Trott and his new firm, BDT Capital Partners, to look for the new equity investors, which could include wealthy individuals, the people said.
Bloomberg