With the blessing of Cadbury’s board, Kraft Foods sweetened its bid for Cadbury on Tuesday to 500 pence per share in cash and 0.1874 Kraft shares for each Cadbury share (up from its previous offer of 300 pence per share in cash and 0.2589 Kraft share for each Cadbury share). We expected that Kraft would be forced to increase its offer price or the cash portion of the deal, or both, to convince Cadbury’s shareholders to accept an offer, so we are not surprised by the news.
At a total consideration of around $19 billion, the deal values Cadbury at a 19% premium to our 703 pence per share fair value estimate and is 13.0x 2009 earnings before interest, taxes, depreciation, and amortisation. In our opinion, Kraft is paying a fair price for this attractive asset, but we intend to lower our fair value estimate for Kraft slightly, as the firm's use of its undervalued stock makes the deal slightly destructive to shareholders. A bidding war for Cadbury is highly unlikely, in our view, given that the deal has the backing of the board, so we expect the saga to finally come to a close. Although Cadbury shareholders have until February 2 to vote their shares in favour of or against the deal, we anticipate the deal will close as expected in February following the termination of the tender offer, and we intend to raise our Cadbury fair value estimate to the deal price.
Strategically, we believe the acquisition of Cadbury makes sense for Kraft, the second-largest packaged foods firm in the world, as it will leapfrog Mars/Wrigley to operate as the leading player in the global confectionery industry (which has higher growth and is higher margin than other categories in the packaged foods space). Further, private-label competition is minimal in the confectionery market (in contrast to Kraft's other segments), and this deal will expand Kraft's international presence (as developing markets are expected to account for 25% of consolidated sales up from 20%), while providing an expanded platform to distribute existing brands. We anticipate that the firm will maintain an investment-grade credit rating and the dividend. That said, Kraft still maintains significant risks with regard to the integration of the global confectionery firm. We will update our analysis of both firms to account for this announcement.
