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At last! The bid for U.K. confectioner Cadbury (NYSE: CBY ) -- first launched by Kraft (NYSE: KFT ) last September -- has come to a tentative conclusion. While Cadbury shareholders have enjoyed a handsome gain over the past months (shares are up nearly 50%), Kraft appears to be the long-term winner.
The happy marriage
Assuming Cadbury shareholders heed their board's recommendation and approve the $19.6 billion cash-and-stock offer, Kraft will pick up the maker of Halls, Trident, and Cadbury chocolates for 13 times earnings before interest, taxes, and depreciation (EBITDA). That's well below the mid-to-high-teens benchmark multiple that Cadbury had previously referenced as acceptable, and exactly in line with Cadbury's recent EBITDA growth of 13.6%. Moreover, the valuation undercuts comparable deals going back "well over a decade," according to the Financial Times.
Kraft management has highlighted several key points regarding the pending acquisition, which I've peppered with my own observations below:
- Globally, the combined group would lead the chocolate and sugar confectionery categories, while ranking a "strong number two" in gum.
- The deal would leverage scale opportunities, which Kraft called "increasingly important, in part due to retailers' increasing bargaining power ... and growing portfolio of their own retailer brands." In polite language, Kraft is suggesting that a bigger beast would help stave off the threat of store-brand supremacy.
- Following a happy consummation, estimated pre-tax cost savings would notch "at least" $675 million annually by the end of year three.
- Sales driven by fast-growing developing economies would rise from 20% -- the current figure for Kraft's stand-alone operations -- to 25% for the combined group.
Summarizing the benefits of a Kraft-Cadbury combo, Kraft expects that it would lift its long-term performance targets to 5% revenue growth (up from 4%) and 9%-11% EPS growth (versus the previously announced 7%-9%). Cadbury shareholders have until Feb. 2 to cast their vote.
Warren Buffett's Berkshire Hathaway (NYSE: BRK-A ) recently came out against Kraft's proposal to issue additional shares in support of the Cadbury deal. But that's no longer an issue -- nor, however, is Kraft shareholder approval.
During last-minute talks, Kraft agreed to reduce the share portion of its offer, bringing cash to 60% of the bid. In turn, Kraft's new-share issuance will fall below 20% of existing shares, the threshold for a mandatory shareholder vote. All told, the final Kraft offer is 14% higher than its initial bid.
Meanwhile, the U.K. Takeover Panel has handed underdog suitor Hershey (NYSE: HSY ) a Jan. 25 deadline for making a firm offer.
Happily ever after?
This morning, Buffett revealed that he would've voted against the deal, adding that Kraft relinquished its pizza business to Nestle (OTC: NSRGY) at a bargain. Conversely, an analyst quoted by the Financial Times argues that Cadbury's discounted cash flow, along with the value of Kraft's synergies, yields a fair price for Cadbury that's a whopping 50% above the deal terms.
My own opinion is divided. Cadbury would certainly improve Kraft's growth profile, both in terms of geographic footprint and category exposure. Still, with a deal this size, one has to wonder about the integration risks, and Kraft's cost-savings target does appear a tad aggressive. Also, Cadbury or not, I continue to worry about the long-term health of Kraft's U.S. consumer business, since it has no real value-category foothold.
Of course, if Kraft runs into trouble down the road, it could jettison Cadbury's Halls line at a potentially handsome premium. Big-name pharma players have been keen on gaining non-prescription exposure -- sanofi-aventis (NYSE: SNY ) recently snagged OTC-specialist Chattem, and Pfizer (NYSE: PFE ) got back into the OTC market with its 2009 purchase of Wyeth.
In other words, a combined Kraft-Cadbury would have plenty of options. And for investors who have a Kraft crush, I suggest that you pursue a similar theme, nibbling at shares rather than diving in. Kraft-Cadbury looks good as a menu item, but let's see what reality actually serves up.