The Wall Street Journal reports that Hershey and Ferrero (an Italian confectioner of Tic Tacs, Nutella, and its namesake chocolate) are in talks to make a bid to acquire Cadbury. As we've stated in the past, the best strategic fit for Cadbury lies with Hershey, although we questioned whether the firm could obtain financing for an acceptable offer. A combined bid with Ferrero would make a deal for Cadbury's attractive asset portfolio more feasible for Hershey, in our opinion. We're holding tight on our fair value estimate for Hershey.
We contend that an all-cash offer from Hershey and Ferrero would be more appealing to Cadbury shareholders than Kraft's current cash-stock offer. In response to any potential offers, Kraft would be able to raise its bid. Given the strategic rationale of the deal, we would expect Kraft to consider adjusting its offer to appeal to Cadbury shareholders, by either paying a higher price or increasing the cash portion of the offer, which stands at around 40%. Kraft management has shown prudence in the pursuit of Cadbury so far, and we believe the packaged food firm is unwilling to meaningfully increase its bid, as management has stated its intent to maintain an investment-grade credit rating and the dividend. If Kraft were to reach a deal with Cadbury below a midteens trailing-12-month EBITDA multiple, the combination would probably be accretive for Kraft shareholders.
By acquiring a portion of Cadbury's portfolio, Hershey may be able to accelerate revenue growth using Cadbury's broad global distribution network, which could be an equitable substitute for the pair's lack of cost synergies. Hershey's interest is probably heightened by its 25-year license to sell Cadbury chocolate in the United States, which is set to expire in 2013. Although the specific terms aren't disclosed, the ultimate buyer would probably leverage its existing platform to distribute Cadbury's offerings, leaving Hershey out of the loop. From Ferrero's perspective, a deal for Cadbury would also extend the firm's global distribution (as sales are currently concentrated in Germany, Italy, and France), as well as probably lead to some cost synergies because of overlap in its European distribution platform.
However, the structure of a potential offer from Hershey and Ferrero is still highly uncertain. It remains to be seen how the two firms would divide the portfolio or whether Cadbury's assets would be operated by both firms through a joint venture agreement. Further, both firms are closely held, which could make an agreement more challenging, as Ferrero continues to be run by members of its founding family and Hershey is controlled by the Hershey Trust. We'll provide an update as the situation develops.
