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Kraft defiant over Cadbury valuation

By Nick Hughes, 09-Sep-2009

Related topics: Suppliers, Kraft's Cadbury bid

Kraft Foods has defended its valuation of the Cadbury business and insisted that it remains the most logical buyer for the UK confectionery manufacturer.

In response to media commentary that Kraft’s offer of £7.45 ($12.30) per Cadbury share significantly undervalued Cadbury, Michael Osanloo, executive vice president, strategy, Kraft Foods said: “There has been a lot of talk about what Cadbury is worth. The simple fact is that Cadbury is worth what someone is willing to pay for it – nothing more. We are the most logical buyer but we will remain financially disciplined.”

Analysts have pointed to Mars’ acquisition of Wrigley, where Mars paid 19.3 times Wrigley’s pre-tax earnings, as proof that Kraft’s valuation, representing just 12 times Cadbury’s estimated 2009 pre-tax earnings, is below the mark.

Favorable proposal

But Osanloo claimed that the offer, which values Cadbury at $16.7bn, represents a 31 percent premium on Cadbury’s share price at prior day close, compared with 28 percent in the case of the Mars/Wrigley deal.

“The debate about multiples misses the point – the world has changed dramatically since then. On the most important comparison point, the premium, our proposal compares favorably.”

Nevertheless, analysts expect Cadbury’s board and shareholders to hold out for a higher price. “We consider that Kraft would need to increase its offer up to £9.00 [$14.90] in order to stand a good chance of getting the deal done,” said Andrew Wood, senior analyst at Bernstein. “Although Kraft’s original bid represented a 31 percent premium to the prior close, and so might seem attractive, the premium was from a very low base. We consider that Cadbury’s stock was already fundamentally undervalued on a standalone basis.”

In a call with analysts yesterday, Kraft Chief Executive Irene Rosenfeld reiterated that Kraft would continue to be disciplined in its attempt to capture Cadbury but has yet to rule out a hostile takeover. Kraft remains the only bidder despite Nestle and Hershey being touted as potential suitors. Wood believes the absence of rivals could play into Kraft’s hands.

“The lack of competitive pressure, and the absence of bids and counter bids, is likely to tap the amount Kraft has to pay,” he said.

Strategic opportunities

Wood added that he continued to believe an acquisition of Cadbury would make “perfect sense” for Kraft, citing numerous strategic opportunities for the business.

Cadbury is deeply entrenched in developing markets such as India and Latin America where Kraft is relatively weak and a deal would increase Kraft’s exposure to emerging markets from 20 to 25 percent of sales. Furthermore, having Cadbury on board would allow Kraft to increase its distribution density in Western Europe where Kraft’s margins are still single-digit, markedly below its industry peers.

Wood also noted that a Kraft Cadbury tie-up would create a global sweet snacks powerhouse with strong synergies in its product portfolio. While Kraft is strong in the relatively mature cookies and crackers category, Cadbury is well represented in chocolate and sugar confectionery and has an enviable position in the fast growing chewing gum sector.