Kraft's Cadbury Bid Faces Hurdles

123jump.com Staff
05 Jan, 2010
New York City

Kraft revised its offer for Cadbury ahead of regulatory deadline in less than two weeks. The offer of $16 billion has 20% more cash than the previous offer but is still at least 5% below the price that most investors are seeking. Kraft sold its frozen pizza division to Nestle for $3.7 billion.

[R]6:00 PM New York – Kraft revised its offer for Cadbury ahead of regulatory deadline in less than two weeks. The offer of $16 billion has 20% more cash than the previous offer but is still at least 5% below the price that most investors are seeking. Kraft sold its frozen pizza division to Nestle for $3.7 billion.[/R]

Kraft Foods revised its offer for UK based Cadbury Plc as it faces a deadline for its proposal set by the British Takeover Panel. Kraft will release final details on January 19.

The offer was still at $16 billion or 756 pence a share but Kraft increased the cash portion of the deal. The food maker said that in discussion with several investors it learned that investors prefer the guarantee of cash. Also Kraft shareholders prefer the company to not issue more shares.

The influential investor and 9.4% shareholder of Kraft, Warren Buffet controlled Berkshire Hathaway said that it voted “no” for the company to issue 370 million new shares to fund the acquisition and hoped that the company will not overpay for the transaction.

The statement said, “The share issuance proposal, if enacted, will give Kraft a blank check allowing it to change its offer to Cadbury, in any way it wishes, from the transaction presented to shareholders in the proxy statement.”

The company repurchased its stocks for $3.6 billion in 2007 at $33 each and now wants to issue 370 million new shares when the stock is trading near $28.

But, Warren Buffett went on to say that he reserves the right to change his views if he believes that the offer will not hurt the value of the stock. Berkshire holds 138.3 million shares.

Cadbury and several holders of shares also voiced their displeasure of the deal.

Cadbury said in a statement, “Kraft has once again missed the point. Despite tinkering Kraft offer remains unchanged and derisory, with less than half the consideration in cash.”

Cadbury statement focuses on the cash portion of the deal because it knows that the company is constrained and does not have enough cash and its stock is undervalued.

Kraft cognizant of this, raise $3.7 billion today after it sold its North American frozen pizza unit for $3.7 billion to Nestle SA. The steep price paid by Nestle prompted immediate downgrades from analysts but Kraft increased its cash portion.

Kraft in pursuing Cadbury decided to give up one of its best performing division with well known brand names of frozen pizzas including California Pizza Kitchen, Tombstone and DiGiorno.

Kraft increased the cash portion by 60 pence to 360 pence a share and valued Cadbury at 10.2 billion pounds or $16 billion. Kraft bid values Cadbury at 756 pence, below the share price of 800 pence that most investors are holding out for.

The deal between Kraft and Nestle also changes the competitive landscape. Nestle appears to be out of the race to acquire Cadbury either independently or in partnership with Hershey. Ferrero SpA of Italy is looking to form the bid but analysts are not that hopeful.

Kraft ((KFT)) share increased 3.1% to $28.29 and Cadbury Plc decreased 3.2% to 778.50 pence. Cadbury traded as low as 568 pence on September 4, 2009 before the deal was announced in November when the deal was valued at 740 pence a share.

Kraft shareholders are scheduled to vote on the deal on February 1 and Cadbury shareholders have until Feb 2 to tender their shares. If additional suitors emerge than the date will be extended.