Despite Two Rebuffs, Kraft Is Still Sweet on Cadbury

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Darren Staples / Reuters; M. Spencer Green / AP

Those with a sweet tooth have long found it hard to resist a second bite of Cadbury chocolate. Kraft, it seems, is no different. The world's second biggest foodmaker unleashed a hostile bid for the British confectioner on Monday, offering $16.3 billion in cash and shares under the same terms as a friendly approach that was rejected by Cadbury in September. Absent any sweetener, Cadbury's board "emphatically rejected this derisory offer," chairman Roger Carr fired back in a statement. The bid, he said, "does not come remotely close to reflecting the true value of our company."

As the latest turn in Kraft's effort to forge the world's biggest confectionary business, the low-ball offer — worth $12 per Cadbury share, or 4% less than its earlier proposal thanks to an interim fall in Kraft's shares — was never likely to be welcomed. As a multiple of Cadbury's profit before deductions for tax and other charges, the deal is worth roughly a third less than the average for takeovers in the global food business since 2000, according to investment-research firm Sanford C. Bernstein. Granted, the world is in an economic slump and there's no rival bid on the table, but Kraft's offer would amount to "the lowest multiple in a major food deal over the last decade by 18%," Bernstein analysts wrote in a note to clients on Tuesday.

So why did Kraft bother? Announced hours before a late Monday deadline for a formal offer from the company under U.K. takeover rules, the proposal buys Kraft valuable time to figure out its next move. Under the British code, the Illinois-based firm now has 28 days to distribute the details of its proposals to Cadbury's investors; those shareholders could then expect a written response from Cadbury within two weeks. Once that's in the mail, Kraft will have just over a month to make any final offer.

That the companies are set for a drawn-out saga — a likely revised bid could come as late as the end of January — is clear. What value Kraft may be prepared to place on Cadbury is less so. The British firm's shareholders are thought to want at least $13.4 a share; many analysts think they should hold out for more. But in the absence of a rival bidder, Kraft's proposal — which still offers a premium of 26% over Cadbury's share price prior to the company's initial approach in September — may start to look more appetizing. After all, short-term investors have poured into Cadbury shares in recent weeks. Rather than see Kraft walk away, many will be hoping to cut a deal.

But there's risk involved for Kraft too. Any time spent mulling a better offer could see a further slide in Kraft's shares and an upturn in performance at Cadbury. After all, the U.K. firm, expected to publish a trading update on Dec. 15, outperformed all other major global food businesses in the third quarter. A rally in sterling, meanwhile, could further add to the cost of boosting Kraft's bid. What's more, "we persist in our belief that neither Nestlé nor Hershey will willingly stand by and be marginalized into distant No. 3 and No. 4 positions in global confectionary," London-based analysts at investment bank Jefferies International wrote in a note to clients on Tuesday. A possible joint Nestlé-Hershey bid to break up Cadbury — with Pennsylvania-based Hershey taking the bulk of its chocolate business and Switzerland's Nestlé swallowing the rest along with Cadbury's gum brands — "would seem to make sense," the analysts said.

Expect Kraft to put up a stiff fight for Cadbury. The British firm's muscle in the U.K., Latin America and major emerging markets like India could bring a powerful lift to a business that has looked sluggish in recent quarters. Not for the first time, Cadbury offers a welcome rush of sugar.