London: Kraft Foods said it was determined to pursue Britain’s Cadbury, which soared in value after it snubbed a $16.7 billion bid from the US group, reinforcing hopes of a broader-based pick-up in merger activity.
Analysts said North America’s biggest food group might have to raise its offer by up to 40% after shares in the world’s No.2 candy and chocolate maker increased by almost half on news of the approach, settling at just under 800 pence compared with Kraft’s 745 pence-per-share pitch.
The price spike reflected analysts’ views the combination would be a success, chances of a counterbid and bankers’ hopes that rallying equity markets and a brighter economic outlook to make companies more confident about deals might mean an M&A revival was just around the corner.
“No one is questioning the rationale for this tie-up, all the chatter is about price,” one senior M&A banker said. “It’s a classic strategic deal that has been anticipated for a number of years.”
Cadbury, whose brands include Bassett’s Liquorice Allsorts, Maynards Wine Gums and its trademark chocolate bars, had sales of £5.4 billion ($8.8 billion) last year while revenues at Kraft, which makes Maxwell House, Oreo cookies and Ritz crackers, were $42 billion.
Kraft said its cash-and-shares offer represented a 42% premium to Cadbury’s share price on 3 July, when analysts raised the possibility of sector consolidation.
Cadbury’s stock was up 40% at 796 pence by 1228 GMT, around 15 pence below its all-time high and posting its biggest percentage gain in a single day in at least two decades.
“Our initial view is that this represents a competitively-pitched offer, but something less than a knockout blow,” said Investec analyst Martin Deboo.
“For a useful comparison, we think that investors need to look as far back as Nestle’s acquisition of Rowntree in 1988, where we recall that the exit premium was in excess of 100% of Rowntree’s pre-speculation share price.”
Panmure Gordon & Co recommended investors hold out for at least 800 pence a share and Bernstein Research suggested a price of between 855 pence and 1,070 pence might be achievable based on earnings potential and past deals.
One top 20 investor in Cadbury who declined to be named also said benchmarks set by other deals indicated Kraft would need to offer at least 10% more, “and you could be looking at 20 to 30% higher.”
Kraft has offered 300 pence in cash and 0.2589 new Kraft shares per Cadbury share in the hope it can create a “global powerhouse in snacks, confectionery and quick meals” with combined revenues of about $50 billion.
Evolution Securities, which sees fair value for Cadbury in any takeover of at least 1,000 pence a share, said a tie-up would put the group neck-and-neck with Mars-Wrigley, with each boasting about 15% of the global confectionery market.
It would still be half the size of Nestle, which reported revenues last year of 109.9 billion Swiss francs ($104 billion).
Consolidation hopes helped drive shares in the food and drink sector as a whole up 2.9%, outperforming a 1.3% rise for European blue-chips.
Analysts also raised the prospect that Nestle might make a counterbid for Cadbury, perhaps in a joint approach with US chocolate group Hershey Co.
“The most likely alternative bid would come from Nestle, although it would face considerable anti-trust issues and lower cost synergies,” analysts at Cazenove wrote in a research note.
Nestle chief executive Paul Bulcke declined to comment directly but said the company had no major acquisitions planned though was always open to opportunities.
Cadbury said it believed Kraft’s approach fundamentally undervalued the British company.
Northfield, Illinois headquartered Kraft said it was not ready to throw in the towel, however, describing itself as “committed to working toward a recommended transaction and to maintaining a constructive dialogue.”
Analysts agreed a deal made sense, but at the right price.
“We think it makes perfect sense for Kraft to acquire Cadbury and they should do it ... subject to the right price for both parties,” Bernstein analysts wrote.
Global merger and acquisition activity fell 44.5% to $872.5 billion in the first half of 2009, according to Reuters data - the lowest first half volume since 2003 and the steepest decline since 2001. Lazard is acting as lead financial adviser to Kraft with Centerview Partners, Citigroup and Deutsche Bank also advising.