Latest developments in Kraft’s (KFT) pursuit of Cadbury (CBRY):
From DealBook:
The Sunday Times of London reports that Kraft is planning to increase its bid in the next two weeks, but provides no sourcing and few details.
Kraft’s cash-and-share offer currently values Cadbury at 736 pence a share, 8 percent below its closing price of 797.5 pence on Dec. 31.
Under Britain’s Takeover Panel rules, Kraft has until Jan. 19 to raise its offer, after which it can only do so if a rival bid emerges.
A report on Saturday suggested Italian confectioner Ferrero had met with private equity firms, as well as Hershey, to discuss a possible bid for Cadbury.
Cadbury said on Dec. 14 that Hershey and Ferrero had both indicated they were also contemplating bids.
However, The Sunday Times said that Cadbury’s chairman, Roger Carr, is expected to reject any bid from Hershey or Kraft unless it tops 800 pence a share.
Britain’s Takeover Panel gave Cadbury three extra days this week to publish its 2009 results that could become a key plank in its defense against Kraft’s bid.
Reuters reports that “Kraft Foods is set to clear a hurdle in its hostile 10 billion pound takeover bid for Cadbury by winning EU approval this week, a source familiar with the situation said on Monday.”
Deal Journal suggests Nestle (NESN) may use some of the proceeds of today’s Alcon deal to go after Cadbury: “Novartis is paying Nestle $28 billion for its 52% stake in Alcon, the eye-care company. Nestle says it plans to use about $9.65 billion of the proceeds to buy back shares. That means about $18 billion will be left over, enough to, perhaps, top Kraft Foods’ $16.9 billion bid for Cadbury.”
But Bloomberg reports that the buyback may signal no big acquistions by Nestle. “They’re basically telling you that they aren’t planning a major acquisition, but it still leaves them with the flexibility if a strategic opportunity comes by,” said Marco Gulpers, who has a “hold” recommendation on Nestle shares as an analyst at ING Wholesale Banking.
John Ogg at 24/7 Wall Street speculates that a deal for Cadbury would spur more M&A activity in the sector: “ConAgra Foods, Inc. (CAG) would suddenly look tiny when compared to Kraft as ConAgra’s market cap is about $10.2 billion versus about $40 billion for Kraft (KFT). Unilever NV (UN) and Nestle might be interested in other deals out there. General Mills (GIS) would risk being small despite a $23 billion market cap. HJ Heinz (HNZ) would suddenly be a small fish despite a $13.5 billion market cap, and farther down the chain is Hershey with its $8.15 billion market cap.
For latest analyst comment see Alacra Pulse.
Technorati Tags: (CAG), (GIS), (HSY), (KFT), (NESN), (UNA), Cadbury, CBRY, ConAgra, confectionery, Ferrero, General Mills, H.J. Heinz, Hershey, Kraft Foods, M&A, mergers and acquisitions, Unilever
Confidence is returning to the European mergers and acquisitions market, with a significant proportion of companies planning a major deal in 2010, according to the second annual survey of European companies’ M&A plans, conducted by The Boston Consulting Group (BCG) and UBS Investment Bank.
Yet ongoing uncertainties about the economic outlook and sustainable levels of profitability are likely to lead to smaller, lower-risk consolidation deals than before and might deter some companies from entering the M&A market.
As the survey reveals, there are grounds for being both courageous and cautious.
Key findings include the following:
- One in five companies plans to buy a business with sales of more than €500 million in 2010, including nearly one in two large companies with market capitalizations in excess of €20 billion.
Although there are substantial variations among industries, one of the encouraging signs is that 44 percent of companies within the chemicals sector—often a harbinger of economic recovery—are planning to make a large-scale acquisition within the next 12 months.
- M&A transactions are most likely to be “horizontal” consolidation deals, expected to be the dominant deal type by 68 percent of surveyed companies. Typically, these are expected to be smaller, lower-risk acquisitions than the transformational deals previously anticipated for and to some extent executed in 2009. This indicates that there is a degree of caution in the market and that the effects of the financial and economic crisis are still being felt.
- Restructuring deals are also expected to rise steeply, with nearly one out of three companies planning to strengthen its strategic and financial positions by divesting businesses. These disposals will be essential not only for cleaning up corporate portfolios but also for generating proceeds to help fund new acquisitions as the M&A market picks up. In fact, 75 percent of companies believe that investors, banks, and other creditors will exert greater pressure to go down the deal-based restructuring route in the coming 12 months. Moreover, one-third of companies believe that even distressed divestitures could make valuable targets.
Full free report can be downloaded here.
Technorati Tags: European companies, M&A, mergers and acquisitions
Standard & Poor’s has issued a Credit FAQ report on the ratings implications of potential M&A activity for diversified industrial companies. The full report is available as a complimentary download from the AlacraStore.
Excerpts from Credit FAQ: How Mergers And Acquisitions Could Affect The Ratings Of Diversified Industrial Issuers In 2010
Standard & Poor’s does not consider the capital goods sector as particularly fertile ground for large multibillion dollar transactions, and does not expect a big wave of transformative merger and acquisitions (M&A) in 2010. Nonetheless, over the past few months, we have observed early signs of increasing activity among certain diversified industrial issuers. Others have acknowledged a growing appetite for external growth and commented that they see more potential opportunities developing in their acquisition pipeline. This is gradually supplanting the very cautious sentiment and focus on preserving financial strength of the first nine months of 2009.
The dozen investment-grade-rated diversified industrial issuers in the capital goods sector have all experienced reduced revenues and profits in 2009. Many entered the downturn with what we consider solid credit measures and the capacity to absorb some downside risk. Although most issuers’ credit ratios have often fallen short of our expectations, most have managed to limit the deterioration and have preserved liquidity. While we left many issuer ratings unchanged throughout the downturn, we nonetheless lowered the ratings on several high-profile issuers or revised their rating outlook to negative in 2009.
Despite recent signs of sequentially improving order rates and the potential for some inventory rebuilding, we expect that growth will generally remain tepid throughout 2010. Therefore, it is not surprising that acquisitions are returning as a potentially attractive growth engine for management teams.
Through the downturn, industrial manufacturers’ cash flows have benefited from tight working capital controls and from lower capital expenditures. Some companies have used cash flows to reduce debt, while others have gradually built up cash reserves. This liquidity may help fund acquisitions for several issuers. Still, at the end of 2009, we believe that credit measures will remain generally weaker than our expectations for many issuers. While operating leverage could spur some recovery in operating profits in 2010 even with modest sales growth, the risks of a protracted period of flat demand or a “double dip” recession remains a concern.
While we believe that diversified industrials have generally retained, consistent with their current rating levels, some moderate capacity for acquisitions, those issuers with weaker-than-average credit metrics and modest excess cash reserves have limited capacity overall, in our view.
The full report Credit FAQ: How Mergers And Acquisitions Could Affect The Ratings Of Diversified Industrial Issuers In 2010 has been made available for free download to Research Recap users for 30 days by special arrangement with Standard & Poor’s Credit Research, an Alacra content partner. After 30 days the report will revert to its regular AlacraStore price of $300.00)
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Despite the vigor of Cadbury management’s rejection of Kraft’s takeover offer, it has not moved the needle much on the deal. While Cadbury (CBRY) alluded to interest from other potential buyers or merger partners, such as Hershey (HST) and Ferrero, Kraft (KFT) is under no immediate pressure to raise its offer unless and until something concrete emerges.
Cadbury is trading about 8% above the offer price, a premium that could easily be erased (or expanded) by a change in Kraft’s stock price and/or currency fluctuations. Indeed, Kraft today stuck to its guns, suggesting it had no intention of raising its bid.
Andrew Wood, an analyst at Bernstein Research said: ‘We consider that the increased medium-term guidance plays directly to the ‘true’ value of Cadbury, which should incentivise-Cadbury shareholders to hold out for a higher bid.’
But Charles Stanley analyst Jeremy Batstone-Carr said market reaction to Kraft’s response was muted because it essentially altered little in the takeover battle.
“Whilst Kraft may question the credibility of Cadbury’s defence strategy, investors could raise the same concerns regarding Kraft’s recent sub-sector operating performance and its international expansion-integration plans,” he said.
Lex notes that based on valuations of its peer group, an earnings multiple of 16 times would suggest a standalone valuation in the region of 700p per share, before including any takeover premium. “Even in the absence of a competing bid, it now seems inevitable that Kraft must move its offer closer to the 850p per share suggested by past food deal valuations to succeed.”
Batstone-Carr is recommending investors reduce Cadbury shareholdings because Kraft may be unable to justify an offer price around the 850 pence many analysts believe is necessary to win Cadbury.
Lacking a credible alternative bidder, Kraft can sit tight until after the holidays to decide whether to reconsider its bid.
A transcript of Cadbury’s formal response is here.
Previous ResearchRecap posts on this topic are here.
For the latest analyst comments see Alacra Street Pulse.
Technorati Tags: (HSY), (KFT), (NESN), Cadbury, CBRY, confectionery, Ferrero, food industry, Hershey, Kraft Foods, M&A, mergers and acquisitions, Nestle
International mergers and acquisitions are forecast by the OECD to decline by 56% in 2009, the largest year-on-year decline since 1995.
This estimate is based on OECD analysis of data for international M&A activity up to 26 November 2009. The fall is largely due to the 60% decline in value of cross-border merger and acquisitions (M&A) by firms based in the OECD area, from over USD 1 trillion in 2008 to USD 454 billion in 2009.
However, it was also due to the first sharp declines in M&A activity into and from major emerging economies: international M&A activity by firms based in Brazil, China, India, Indonesia, Russia, and South Africa fell by 62% to USD 46 billion in 2009 from USD 121 billion in 2008.
M&A activity into these countries is forecast to decline by almost 40% this year to just over USD 80 billion from just under USD 140 billlion in 2008.
These latest international investment estimates suggest that total foreign direct investment into the 30 OECD countries will fall to USD 600 billion in 2009 from a 2008 total of USD 1.02 trillion.
The full report is available here.
Technorati Tags: foreign-direct-investment, M&A, mergers and acquisitions
The credit ramifications of how GE (NYSE:GE) uses its proceeds from the sale of its stake in NBC Universal, and what Comcast (NYSE: CMCSA) decides to do with its new business—will become clearer only in the coming years, not in the short term. At its starting point, however, the deal appears to offer both companies long-term credit opportunities, Moody’s says in a Special Comment.
“Comcast’s cable system business already stands to generate roughly $25 billion-$30 billion in free cash flow over the next 7-8 years, without NBCU. Without the NBCU stake, this free cash flow might otherwise have gone into moves that would not meaningfully support Comcast’s credit quality, such as buying back significantly more stock or paying higher dividends to shareholders.
With the eventual 100% acquisition of NBCU, Comcast would have another outlet generating significant free cash flow, adding a meaningful asset to support the company’s debt. On the distant horizon, the credit ramifications appear good.
“However, the eventual full acquisition of NBCU leaves Comcast with various options with different credit ramifications. The cable company could merge with NBCU, unifying the credit and effectively providing equal priority and recourse to the debt of both companies and to the assets of both companies. We think this would increase Comcast’s financial flexibility, given its increased scale and diversity, which would be credit positive. Or Comcast could spin off NBCU to Comcast shareholders in a move with no direct benefit to Comcast’s bondholders, or NBCU’s for that matter.”
“The deal also looks good for GE’s credit in the long term, but this depends on how GE uses the proceeds from the NBCU sale. In the near term, initial cash proceeds of about $8 billion (after buying out Vivendi and repaying existing debt) would give GE additional flexibility to support its finance subsidiary, GECC, for which we anticipate a $2 billion capital injection in early 2011. Longer term, these proceeds, plus the full monetization of GE’s ownership in NBCU, would provide additional resources to reinvest in GE’s core industrial businesses.”
Technorati Tags: (CMCSA), Comcast Corporation, GE, mergers and acquisitions
Analysts are mostly skeptical about the likelihood of Hershey (HSY) and Ferrero mounting a successful joint bid for Cadbury (CBRY) to thwart Kraft’s (KFT) pending bid for the company. However, the threat of a rival bid may be enough to coax a slightly sweeter offer from Kraft.
Both Bloomberg and Reuters offer good summaries of analyst opinion and FT Alphaville weighs in with a JP Morgan analysis arguing that it is difficult to see how the financing would work for Hershey without it either almost doubling its existing equity (and convincing shareholders to buy it), or losing its investment grade credit rating.
The big question mark is how much equity can HSY raise from existing shareholders through a rights issue (we doubt Ferrero or Cadbury shareholders would take HSY non voting shares) without the Trust subscribing to the rights and HSY still keeping its dual class share structure. – JP Morgan
The FT’s Lex notes that, “to the distress of Cadbury shareholders hoping for a more full-fat alternative to Kraft’s cheeseparing bid, the likelihood of a Ferrero or Hershey offer – separately or jointly – remains slim.”
In Lex’s view Hershey would be better of partnering with Nestle (NESN).
However, Nestle may be more interested in Mead Johnson Nutrition (MJN) following its spinoff from Bristol-Myers Squibb (BMY). The maker of Enfamil baby formula would appeal to Nestle because of its strength in Latin America and Asia, says Claudia Lenz, an analyst at Bank Vontobel AG.
Previous ResearchRecap posts on this topic are here.
For the latest analyst comments see Alacra Street Pulse.
Technorati Tags: (BMY), (HSY), (KFT), (MJN), (NESN), Bristol-Meyers Squibb, Cadbury, CBRY, confectionery, Ferrero, food industry, Hershey, Kraft Foods, M&A, Mead Johnson Nutrition, mergers and acquisitions, Nestle
Moody’s estimates that Kraft’s (KFT) proposed offer for Cadbury’s (CBRY) would push Kraft’s debt-to-EBITDA ratio above 4.0, weakening Kraft’s financial metrics beyond the typical bounds of a Baa2 rating. “Given its large global scale, strong cash flows and broad portfolio of household brands such as Oscar Mayer, Nabisco, and Maxwell House, Kraft’s rating can tolerate higher leverage than most of its peers’ – but within limits,” Moody’s writes in an Issuer Comment.
Beyond the balance-sheet implications of the proposed acquisition, we now question whether Kraft has put itself on a path of external growth through leveraged acquisitions.
“Remember, it was only two years ago that Kraft bought Groupe Danone’s global biscuit business in a USD7.8 billion debt-financed deal, promising to restore its balance sheet over time. However, before fulfilling this promise, Kraft is now seeking to buy Cadbury in another large leveraged transaction twice the size of the previous one.”
“Nevertheless, we do not expect that the proposed transaction would result in a more than one-notch downgrade of Kraft’s rating, i.e. to Baa3. This is based on our expectation that any changes to Kraft’s current bid will be modest, as well as Kraft’s stated intention to hold on to an investment-grade rating. Moreover, Kraft will likely want to avoid the higher capital costs and reduced credit-market access that would accompany a downgrade to speculative grade.”
An added complexity of a downgrade to speculative grade is that, if it came to pass, it could trigger a change of control provisions in two of Cadbury’s notes (see related article “Change of Control’ in Cadbury’s 2014, 2018 Bonds Offer Holders the Best Protection). This would mean Kraft would have to refinance those notes, replacing them with more-costly debt – something the company will likely try to avoid.
Previous ResearchRecap posts on this topic are here.
For the latest analyst comments see Alacra Street Pulse.
Technorati Tags: (CFT), (HSY), (NESN), Cadbury, CBRY, confectionery, food industry, Hershey, Kraft Foods, M&A, Mars, mergers and acquisitions, Nestle
A new paper from UNC’s Kenan-Flagler Business School finds that M&A transactions between firms with current board connections generate better merger performance and that acquirers obtain significantly higher announcement returns in transactions between connected firms.
The paper’s authors note that “This result is striking considering such deals involve larger acquirers, public targets, and are more likely to be diversifying acquisitions, three factors shown by earlier research to affect acquirer returns negatively.”
Other findings:
- Acquirers pay significantly lower takeover premiums in connected transactions, consistent with the view that board connections help acquirers avoid overpaying for target firms.
- Financial advisory fees paid to investment banks are lower in connected acquisitions.
- Board connections are also positively related to the operating performance of the new firm and negatively related to the probability of forced CEO turnover, suggesting that connected transactions generate better performance in the long run.
- The existence of a board connection between two firms has a positive impact on the probability of a subsequent M&A transaction between them.
Overall, our results are consistent with the hypotheses that board connections are related to higher quality M&A transactions and that they reduce the degree of asymmetric information between the acquirer and the target about the other’s value.
Board Connections and M&A Transactions
by Ye Cai and Merih Sevilir Kenan-Flagler Business School, University of North Carolina
(h/t footnoted.org)
Technorati Tags: board of directors, corporate-governance, M&A, mergers and acquisitions
Kraft’s (KFT) decision to stand pat on its offer for Cadbury (CBRY) should come as no surprise to readers of ResearchRecap. From the beginning we doubted that Kraft’s initial “indicative offer” would set off a bidding war. Other potential bidders each have their own impediments to making a bid and Kraft itself is constrained by credit issues in how much it can raise its offer. And the fall in Kraft’s share price means the company’s formal bid is actually worth less than the original one.
With Cadbury’s swift and firm rejection of the formal offer from Kraft we appear set for a period of standoff before learning whether a deal will ultimately be consummated.
Of course, now that Kraft has placed its cards on the table, other bidders could still emerge or Cadbury could find a white knight partner. Kraft has 28 days to post the offer documents. It then has a few more weeks to revise the price, taking us into next year.
Analysts expect the most obvious candidate Hershey (HSN) to remain on the sidelines. Several analysts expect Kraft to eventually improve the bid, mainly by increasing the cash component, but not by much, absent any competing bidders. And as we have pointed out before, it is not a foregone conclusion that the two companies will reach agreement.
DealJournal has a roundup of analyst comments, as does Reuters, and Dealbook has a roundup of the story so far.
Previous ResearchRecap posts on this topic are here.
For the latest analyst comments see Alacra Street Pulse.
Technorati Tags: (CFT), (HSY), (NESN), Cadbury, CBRY, confectionery, food industry, Hershey, Kraft Foods, M&A, Mars, mergers and acquisitions, Nestle
