Cadbury-Hershey merger would be best
EVER since I can remember, the markets have been expecting a bid for Cadbury. The names in the frame haven’t really changed for 15 years. A bid became even more likely when the firm sold off its soft drinks unit, a decision which was well-received by the markets but which I always thought was a mistake, proof that the firm lacked the mettle to survive on its own. The only reason an approach didn’t come any sooner was that the credit markets were crippled.
Cadbury’s dismissive reaction to Kraft’s low-ball cash and shares opening offer is encouraging, however, and Cadbury could still easily fight off a takeover even at a higher price if it presents its case right. Many in the City believe it should hold out for a £9-£10 bid; I would go even further and put the right price at a whopping £12 a share, compared with Kraft’s 745p (itself a large premium on Friday’s 568p) and yesterday’s closing price of 783p.
Cadbury should also immediately reopen merger talks with Hershey, its US rival and most natural partner. A sensible deal with Hershey would still provide the best long-term growth opportunities; Todd Stitzer, Cadbury’s American chief executive, made a 30-page presentation to Hershey in Florida in January 2007 but the deal fell through because it still owned a soft drinks business at the time.
Evolution Securities calculates that Kraft paid 2.3 times sales for Danone’s biscuit business, a lower growth and lower margin business. Kraft’s current offer is just 1.9 times sales, which is too cheap but one which it could sensibly afford (it helps that Warren Buffett owns a nine per cent stake in the firm). Kraft’s estimate of a $625m cost savings sounds right (worth a net present value of $4bn with tax advantages) and the product cross-selling opportunities would be huge.
But the real comparison comes with Mars’ purchase of Wrigley in 2007. While this was at the height of the bubble, it paid 34 times earnings (p/e) and 19 times earnings before tax, depreciation and amortisation (Ebitda). Kraft is offering a mere 11.5 times Ebitda. My £12 a share doesn’t sound as ridiculous when put in that light. The danger for Kraft is that it would have to take on too much debt.
The main alternative would be a joint Nestle-Hershey bid, with the Swiss giant grabbing Cadbury’s huge chewing gum business, and the US firm taking the chocolate business (while returning Kit Kat US to Nestle). This is hardly a perfect solution. Nestle, which in the 1980s famously paid a 100 per cent premium to buy Rowntree – another 19th century business founded by Quakers – would be blocked for anti-trust reasons from owning Cadbury’s chocolates business. Hershey on its own would be too small: its market cap of $8.8bn is much lower than Cadbury’s. A better alternative, in strategic terms, would be a friendly Hershey-Cadbury merger. The US firm has few international and gum operations; Cadbury is largely absent from the American market, with its products produced under license by Hershey. But the Hershey Trust, which controls the US firm, would have to learn to give up control.
Unless a bidder makes an offer for Cadbury that is simply too good to be true, a friendly merger would make most sense. Cadbury is a rare jewel; shareholders would be stupid to let it go on the cheap. [email protected]