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| Cadbury's chocolate products are seen for sale in a newsagents in London. Kraft Foods Inc. on Monday proposed a 10.2 billion pounds ($16.7 billion) takeover of Cadbury PLC, which was immediately rejected by the British maker of chocolate, gum and candy. | ||
Cadbury, the second-largest global candy maker with brands like Trident, Dentyne and Cadbury Creme Eggs, quickly rejected the surprise offer by Kraft Foods on Monday, saying it fundamentally undervalues the company. But Kraft CEO Irene Rosenfeld is continuing to make a case for the deal, which would expand Kraft's global footprint.
Cadbury's rejection of the bid, however, opens the door to discussions with others. Analysts suggest Switzerland-based Nestle, the world's largest foodmaker, and U.S.-based candy maker Hershey might come together to consider making a bid of their own.
Kraft, the world's second-largest foodmaker with brands like Ritz, Oreos and Toblerone chocolate, said Tuesday that it plans to continue discussions with Cadbury and will try to keep the efforts "friendly." Rosenfeld said she believes Cadbury will realize the value of the offer in the coming weeks.
"We fully expect either a dialogue between these two companies to commence resulting in an increased offer, or hostile offer from Kraft," Stifel, Nicolaus & Company Inc. analyst Christopher Growe wrote in a note to investors Tuesday.
Some analysts say cash may prove more important as Cadbury's investors have limits on how much U.S. stock they can hold. But Kraft dismissed the concerns, saying Cadbury has an array of international and U.S. investors as well who would see the benefit of holding Kraft stock.
Kraft declined to discuss if it would be willing to increase the cash portion of its offer or turn the offer hostile.
The Northfield, Ill.-based company said it does not believe it will have any difficulty financing the current proposal but said it remains committed to not weakening its credit rating in the deal, which could be affected by increasing the cash portion of its offer.
Kraft shares fell $1.65, nearly 6 percent, to close at $26.45, in the first day of U.S. trading since the offer became public. Cadbury shares rose 3 pence to 786 pence on the London Stock Exchange after rising sharply Monday.
The lure of the candy sector is strong right now, as its products have higher profit margins than some other packaged foods. It is also considered an affordable luxury, particularly important in a recession.
A Kraft-Cadbury combination would become a global food giant with more than $50 billion in combined revenue.
Cadbury would have access to Kraft's strong position in North America and benefits of size. Kraft estimates annual cost savings of $625 million stemming from a potential acquisition on top of both company's recent spending initiatives.
A deal would also help Kraft expand its global presence with access to Cadbury's more diverse business, including its strong foothold in developing countries like India and Mexico.
The key to a successful deal could be cash. Kraft proposed paying 300 pence (about $4.95) in cash and 0.2589 new Kraft Foods shares per Cadbury share. The offer is a more than 30 percent premium over Cadbury's closing price on Friday but the proposal depends heavily on the stock portion of the offer.
As for competing bids, Hershey wouldn't be likely to make a bid on its own because of its smaller size and complications with its ownership.
Hershey's late founder, Milton S. Hershey, established a charitable trust that remains the company's majority owner and has said the trust will not give up its controlling stake.
Analysts say that limits the company's flexibility to grow through a merger because issuing stock to pay for an acquisition would dilute that stake.
The trust's position goes back to 2002, when the previous trust board sought to sell the company. That prompted a ferocious community backlash and a lawsuit by the state attorney general, who led a purge of trust board members who voted for a sale.
With rumors swirling in 2007 of a merger with Cadbury, the trust engineered a purge of the company's board and Hershey's then-chief executive.
But a joint bid by Hershey and Nestle makes sense, said Edward Jones analyst Matt Arnold.
Nestle could assume control of Cadbury's gum business and Hershey could absorb its chocolate business [avoiding antitrust issues that Nestle may encounter by taking on the chocolate brands and giving Hershey the added size and financial weight it needs to make a deal.
Hershey and Nestle both declined to comment.
By Sarah Skidmore (AP)
