New York / Zurich: Hopes of a takeover battle over British confectioner Cadbury receded as Nestle ruled itself out as a suitor and Kraft sweetened its hostile 10.2 billion pound ($16.4 billion) offer.
Shares in Cadbury fell as much as 2.4% after Switzerland’s Nestle, the world’s biggest food group, said it did “not intend to make, or participate in, a formal offer” for
Kraft meanwhile sought to win over Cadbury shareholders by offering to use the full net proceeds from a $3.7 billion sale of its North American frozen pizza unit to Nestle to raise the cash portion of its offer by 60 pence a share to 360 pence. It kept the overall size of the offer unchanged by reducing the share element by an equivalent amount.
“Kraft Foods is doing this because of the desire expressed by some Cadbury security holders to have a greater proportion of the offer in cash,” Kraft said in a statement. The US company added some of its own shareholders had asked it be “more sparing” in its use of Kraft shares in its bid.
Cadbury has so far rejected Kraft’s share and cash offer but was not immediately available for comment on Tuesday.
The maker of Dairy Milk chocolate has described Kraft’s approach as derisory, while investors in the company have said Kraft would need to substantially raise the bid to attract their interest.
“This doesn’t really change anything. It was never really the form of the deal that was the problem, it was always the price,” said one top 20 Cadbury investor.
Some investors have, however, said in the past that a higher cash component would make the Kraft’s offer more palatable.
Kraft said it will give detailed terms of the alternative by 19 January, the last day Kraft is allowed to amend its cash offer under British takeover rules. The US food maker also extended its deadline for shareholders to accept its offer to 2 February.
The Kraft offer will allow Cadbury shareholders to opt for more cash in lieu of some of the new Kraft shares they would have been entitled to receive.
The price at which Cadbury shareholders can opt for a higher cash portion will be set as the market price of Kraft shares, translated into pounds sterling, at the close of business the day before Kraft announces the terms of the cash alternative.
Nestle’s sale of a majority stake in eye care group Alcon to Novartis this week has left it with plenty of cash for acquisitions, even after launching a new 10 billion Swiss franc share buyback, which had fuelled speculation it could enter the fray for Cadbury.
“The decision not to pursue Cadbury was always clear despite market speculation to the contrary. Now it’s in the open,” said independent analyst James Amoroso. “As I have repeatedly maintained, the Cadbury race is a one-horse race. Now Kraft has some more cash to put behind the bid.”
Some analysts still think another suitor might emerge, however, given that US-based Hershey and Italy’s Ferrero are still both waiting on the sidelines.
“We think that Hershey is keen to make a deal with Cadbury,” analysts at Numis wrote in a research note.
“In reality Nestle is acting as a fund provider to the Cadbury deal and we would not be surprised to see the Swiss group play that role again by buying assets from Hershey, the Kit Kat brand in the US being an obvious candidate.”
Hershey and Ferrero have both indicated they are contemplating bids, although bankers say there are significant barriers.
Nestle said the frozen pizza business it is buying from Kraft, which had 2009 sales of $2.1 billion, would boost its earnings per share in the first full year of ownership and that synergies, at an estimated 7 percent of sales, would be fully realised within five years. “Nestle’s acquisition of the Kraft pizza business is certainly not a cheap one,” said Richard Withagen, analyst at SNS Securities who has a “reduce” rating on Nestle shares and a price target of 44 Swiss francs. “While the company has a strong track record in realizing synergies, it needs them to make this deal value accretive.”