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Kraft sweetens offer with cash, lands Cadbury Print E-mail
Wednesday, 20 January 2010

(Reuters) - Kraft Foods sealed a friendly deal to buy British candy maker Cadbury for about $19.6 billion (11.9 billion pounds) after frantic last-minute talks broke an impasse over price.

Kraft chief executive Irene Rosenfeld had to inject more cash into her bid and drop the number of new shares in the offer to win over Cadbury chairman Roger Carr and mollify billionaire investor Warren Buffett, the U.S. food company's top shareholder.

The deal would create the world's biggest confectioner, and analysts see little likelihood of a counterbid.

The cash-and-stock agreement, which dealmakers said was struck after all-night negotiations at the London headquarters of investment bank Lazard, values each Cadbury share at 840 pence. Shareholders are also set to get a 10p special dividend, bringing it to a total of 850p.

Rosenfeld had prompted the talks by telephoning Carr on Sunday and suggesting a price of 830p. Although Carr insisted on 85Op, they met on Monday morning at the Lanesborough Hotel, Hyde Park, in central London, where she offered 840p.

Carr was firm and had his board's backing to insist on "850p or nothing" so advisers for both companies worked into the night to arrive at the agreed-upon deal.

The final offer marked a 14 percent increase over Kraft's initial bid of 745p and about 11 percent above the value of the offer on Friday. The price tag also is 50 percent above where Cadbury's stock was trading the day before Kraft's initial bid was disclosed in early September.

"Kraft has acquired a great asset at a great price and should be given credit for this," said Sanford C. Bernstein analyst Andrew Wood. "We consider that this is a bargain -- the lowest multiple of any major M&A deal in the global food space in well over a decade."

The combined company will just overtake privately owned Mars-Wrigley as the world's top sweet maker, bringing under one roof Cadbury's Dairy Milk chocolate and Trident gum and Kraft's Milka, Toblerone and Terry's chocolate brands.

Cadbury is attractive to Kraft because of its strong growth in emerging markets, such as India and Latin America. Kraft, famed for its Oreo biscuits and Philadelphia cream cheese, derives well over half its sales from the mature North American market.

Cadbury shares hit a record high of 838 pence in early trading and closed up 3.6 percent at 836.5p. Kraft fell 2.7 percent to $28.78 on the New York Stock Exchange.


The new bid, which won unanimous recommendation from the Cadbury board, consists of 500p of cash and 0.1874 new Kraft shares. Originally, Kraft had offered 300p cash and 0.2589 share.

Buffett, who owns a 9.4 percent stake in Kraft, had warned Rosenfeld not to overpay and issue too much stock. Kraft said on Tuesday that it was issuing 265 million new shares instead of 370 million it had earlier planned. Buffett was not immediately available for comment.

Cadbury shareholders now have until February 2 to decide whether to accept a deal that values the shares at 13 times the company's estimated earnings before interest, tax, depreciation and amortization in 2009. Kraft expects the deal to close in mid-February.

"At the end of the day, we would pay what we thought this outfit was worth," Rosenfeld told Reuters. "I believe paying 13 times EBITDA for an asset of this quality is a very good price.

Although Kraft is paying more, Rosenfeld said she expected confirmation of the company's investment-grade credit rating later on Tuesday.

Rosenfeld increased Kraft's annual cost savings target to at least $675 million by year three, up from $625 million, and said she expected the combined company to add jobs in the UK, where Cadbury already employs 46,000 people.

Cadbury unions have opposed the move, fearing big job cuts. UK politicians have also weighed in, with general elections looming. Prime Minister Gordon Brown told a news conference after the deal was announced that he wanted to protect investment and jobs at Cadbury.

"We are determined that the levels of investment that take place in Cadbury's in the United Kingdom are maintained," he said.

Felicity Loudon, a fourth-generation member of Cadbury's founding family, was appalled that the company looked destined to fall to Kraft, predicting jobs will be lost and its chocolate will never taste the same.

"We shouldn't give up," she told Reuters. "For a quintessentially, philanthropic iconic brand to sell out to a plastic cheese company -- there's no mix there."


Analysts say a counter bid for Cadbury is unlikely. The UK Takeover Panel gave Hershey, the U.S.-based maker of Hershey's Kisses and Reese's peanut butter cups, and Italy's Ferrero, which makes Nutella chocolate spread and Tic-Tac candy, until January 25 to make a firm offer.

Hershey declined comment on the Kraft-Cadbury deal, but a source familiar with the matter said the company wasn't likely to compete with Kraft's raised bid.

Kraft did not view Hershey as a viable threat until last week, when media reported the company might be close to launching a rival bid.

"Some of the press coverage made them seem like a more serious threat that we didn't want to risk," said a source close to Kraft.

Cadbury has agreed to pay a breakup fee of about $193 million, or about 1 percent of the Kraft offer, should its board or shareholders accept a competing bid.

Kraft said the deal would add to 2011 earnings per share by around 5 cents on a cash basis and give a return on investment at a mid-teens percentage rate, well in excess of the cost of capital.

Kraft was advised by Lazard, Citi, Deutsche Bank and Centerview Partners, and Cadbury by Goldman Sachs, Morgan Stanley and UBS.

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