Kraft-Cadbury: Deal or No Deal?
As the dust settles following Kraft Food’s (KFT) surprise overture to Cadbury (CBRY), it’s looking less and less likely that it will elicit a stampede of competing offers.
While a Kraft-Cadbury combination would be bad news for Hershey (HSY), Nestle (NESN) and Mars, each of them have their reasons why a bidding war would be problematic. Hershey’s stands to lose the most, but its flexibility is limited by its family trust. Nestle would face antitrust hurdles and Mars is still digesting Wrigley’s. As Deal Journal points out, Hershey’s does have one bargaining chip: its rights to distribute Cadbury’s products in the US.
One possibility is a joint bid by Hershey and Nestle, which makes sense to Matt Arnold of Edward D. Jones. Nestle could assume control of Cadbury’s gum business and Hershey could absorb its chocolate business — avoiding antitrust issues for Nestle and giving Hershey the added size and financial weight it needs to make a deal.
Morningstar analysts Erin Swanson and Philip Gorham think Nestle could step in, but that neither the Swiss company nor Kraft have too much room to maneuver.
As The Deal says, Kraft has its own limitations on how much it can sensibly improve its offer. Kraft’s credit rating has been placed on ratings watch negative by Standard & Poor’s and Moody’s, based on the additional debt the company would take on under the current offer. CreditSights has already moved to an underweight recommendation for Kraft.
Given the potential for KFT to stretch its credit metrics near the border of high-yield ratings, we believe current trading levels do not adequately price in event risk and the possibility of entering the crossover space. - CreditSights
CreditSights says that given “KFT’s relatively modest offer and the previous merger talks that Hershey had with Cadbury, we believe a higher offer is likely and that a bidding contest could emerge. However, KFT will be limited in its ability to up the ante given its current goal of retaining an investment grade rating post the acquisition.”
Even though the combination makes strategic sense, there’s also a reasonable chance that no deal will be concluded. As The Deal Professor points out, the Kraft offer is not a formal offer but a “bear hug letter” suggesting an possible offer, that includes preconditions such as the unanimous approval of the Cadbury Board.
Large-scale hostile offers where the original bids were never significantly improved on don’t have a great track record of succeeding. – Dealscape
Sanford C. Bernstein’s Andrew Wood considers that “Kraft would need to increase its offer up to £9.00 [from £7.45].
This may be further than Kraft is willing or able to sensibly go in today’s more cautious post-crisis business environment, so it’s hard to see this deal being consummated at reckless cost. “No deal” may disappoint those looking for a revival of the M&A market, but that may be better than a bad deal.
For latest analyst comment, see Alacra Pulse.
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