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Fatal flaw in Kraft's Cadbury bid? No sweetener Print E-mail
Tuesday, 10 November 2009

By John Goff

Irene Rosenfeld, what were you thinking?

On Monday, the CEO of Kraft Foods announced the food giant had launched a hostile bid for British confectioner Cadbury. Kraft has been sweet-talking Cadbury for some time, eventually making an offer for its rival on Sept. 7 that valued each share of the U.K. company at $11.95.

Kraft got nowhere with that pitch. Now, Rosenfeld is taking her case directly to Cadbury shareholders. Given Rosenfeld's recent statements about what a swell combination Kraft and Cadbury would be, Cadbury shareholders no doubt expected a slightly tarted up bid from Kraft.

And what is Kraft offering this time? $11.95 a share.

Granted, that's a 26 percent premium over Cadbury's closing share price of $9.47 on the last trading day before Kraft made its initial offer. Kraft contends its offer is a fair valuation of Cadbury. According to the Northfield, Illinois-based company, the $11.95 per share works out to 29 times the U.K. candy maker's diluted earnings per share.

"We remain convinced of the strategic merits for both companies of combining Kraft Foods and Cadbury," Rosenfeld said in a statement. "We believe that our proposal offers the best immediate and long-term value for Cadbury's shareholders and for the company itself compared with any other option currently available, including Cadbury remaining independent."

At $11.95 a share, Cadbury is probably going to remain independent. While Kraft clearly doesn't want to get in a bidding war -- with itself, no less -- the lack of a sweetener seems either ill-conceived or flat-out naïve. Given that Cadbury management insisted Kraft's initial bid undervalued the company, shareholders undoubtedly expected a slight bump up in the latest offer from Kraft.

That's just human nature. People never believe your first offer is your best offer.

Unintentional or not, Kraft has just insulted Cadbury's shareholders. It's poor form. And they don't cotton to poor form in the U.K.

In the coming weeks, Kraft will spend much of its time defending what will be perceived as a low-ball bid - rather than touting the virtues of a Kraft-Cadbury union.

In effect, Kraft has put itself over a cracker barrel.

Craig Hutson, an analyst at GimmeCredit, knows the score. In an interview with CNN, he noted that Kraft CEO Irene Rosenfeld has promised to be disciplined in the company's pursuit of Cadbury.

"Kraft has not felt a compelling need to bid against itself," he granted. "But we think this is a tactical mistake to not up the bid to throw a bone to Cadbury shareholders who might be on the fence."

He added: "We don't think this offer has much chance of success."

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