“$16.7 billion, hard to believe that’s hostile but the Cadbury’s board saying it’s more like an offer of chocolate-covered liver which is not very palatable. Sweeten the deal and we mean more cash. What Kraft has offered Cadbury is a deal that would be roughly financed through cash and 60% in stock and Cadbury wants a little better on that. So here we spoke with Irene Rosenfeld, the CEO of Kraft. She had a telephone conference this morning to discuss why Kraft foods, one of the giants in the food industry, wants to take on Cadbury and grow in markets like Mexico and India. And she said during this it was about growth and that she doesn’t think Cadbury can go it alone…
Kraft very strong right now. They’re on a trajectory for growth and everyone expecting they will have to up this deal. As far as mergers and acquisition, they’re happy in that world. I spoke to Harrison Williams and Kraft is confident in the valuation of their stock and able to get the cash financing they need to go forward and everybody seems to think this is a good deal except for Cadbury…” Fox Business Network 9/8/2009
On Monday, Kraft Foods (KFT) went public with its offer to acquire Cadbury Plc (CBY), the British confectioner, for about $16.7 a premium of 31% based on Friday’s closing price. The board of Cadbury almost immediately rejected the proposal, which has been hashed out in private talks prior to the announcement. Cadbury believes that the offer “fundamentally undervalues” the company, and are anticipating a better offer. That being said, Cadbury feels confident in their company’s ability to go it alone if that better offer does not materialize. The 
market has rallied around Cadbury’s shares and the confidence of management as the stock is up 38% Tuesday.
Cadbury is the second largest candy maker in the world, and hopes that perhaps this could lead to a bidding war between rivals. Hershey’s (HSY) would be a possible suitor, as they already have deals to distribute some of Cadbury’s products in the US. However, Hershey’s is smaller than Cadbury and the price is likely prohibitive as they only had $28 million in cash on the balance sheet as of their last reporting.
We thought the offer from Kraft was actually a pretty good deal for Cadbury. The fact that so much of the proposed buy-out comes in the form of Kraft stock is a stumbling block because it is variable. Some analysts speculate that if Kraft were to offer more cash instead of stock, it would be more acceptable. According to our methodology, Kraft stock appears Undervalued at present and could have substantial price appreciation potential going forward.
We had a neutral Fairly Valued rating on Cadbury at its previous price of about $37, so with the price now in the low $50’s it is far less attractive. There is no doubt that Cadbury has grow potential and would make a strong addition to Kraft Foods products, but Kraft may not be inclined to raise the purchase price much. Cadbury management has taken a gamble in hopes of getting a better deal, but it could be the shareholders left with a bitter taste in their mouth if a better offer doesn’t materialize. At the very least, we would expect that further talks could drag on for some time.
