Long Cadbury Shares? Cash Out!

Filed on September 14, 2009

T he chocolate wars have swept the City of London. Kraft’s takeover bid for Cadbury PLC has electrified the UK stock market, with the Footsie at 5000.

However, Cadbury shares soared from 560 to 780 pence after the bid became public, a stunning almost 40 per cent rise in market value.

The markets obviously expect either a bidding war for Cadbury (Mars? Hershey? Nestle? Pepsi?) or, like the target’s board, expect to coax a higher bid from Kraft.

However, I am nervous that Kraft will not risk a credit risk downgrade with a higher bid, that UK pension funds are unhappy at the prospect of receiving Kraft shares plus cash, that the Cadbury board could well learn from the fate of Yahoo when Jerry Yang’s board rejected the first bid from the Evil Empire and that not even mighty Nestle would dare risk an all cash $17 billion bid.

The bird in hand is worth two in the bush in an apt cliché for a white hot takeover stock in the financial twilight zone. If you were lucky enough to own Cadbury, cash out! It trades at 20 times earnings, 3.5 times book value, twice global sales. Like Macintosh Rowntree, this deal is visceral for me, a lifelong fan of Sir John Cadbury’s empires of Daily Milk and Fruit and Nut. But Cadbury the shares are fully valued at current prices. So why wait for another Santa? Cash out!

The psychology, values and strategic calculations of Cadbury Chief Executive Officer Todd Stitzer could well determine the outcome of the Kraft bid.

The Chief Executive Officer is no Hooray Henry toff or icon of the British Establishment like outgoing chairman, Cadbury lifer Sir John Sunderland.

After all, Stitzer orchestrated the purchase of Snapple from Nelson Peitz nine years ago, the $3 billion acquisition of the US chewing gum maker Adams in 2003, closed down 10 factories across the world, demerged Dr. Pepper Snapple on the NYSE, slashed 8000 jobs as part of his global restructuring “Vision in Action” programme and sold the Australian soft drink business to Japan’s Asahi, exiting beverages in toto.

Moreover, Stitzer was CEO when activist shareholder Nelson Peltz teamed up with the Qatar Investment Authority and accumulated a secret stake in the former Cadbury Schweppes, an act that crossed the proverbial takeover Rubicon and put Sir John Cadbury’s fabled offspring in play in Wall Street’s latest round of the chocolate wars. Of course, Stitzer knows that if Kraft seizes control of Cadbury, incumbent senior management will not have a snowball’s chance in hell of surviving the inevitable corporate axe massacre, despite their cushy golden parachutes. Yet, ironically, Todd Stitzer is the CEO who revived Cadbury’s brand with his frenzied deal making, avant-garde advertising campaigns (the drumming gorilla boosted Dairy Milk chocolate brands) and strategic paydirt in buying Adams, which Kraft now so obviously covets.

It is not as if his tenure in the CEO’s hot seat has been without pitfalls. He survived a salmonella related product recall, an accounting scandal in Nigeria, the relative failure for his first fuel for growth restructuring programs and even cryptic communications with the City of London pension fund and insurance grandees who populate his shareholder register.

His decision to demerge Cadbury’s American beverage business (Dr. Pepper Snapple) after takeover maestro Nelson Peltz’s Trian Fund Management acquired a secret stake in a dawn raid in March 2007 was arguably worth the six billion dollar increase in shareholder value that was triggered by the recent Kraft bid. The moment Dr. Pepper Snapple were demerged in a $7 billion spin off, Cadbury became an irresistible takeover target as a global chocolate/chewing gum maker since the low margin soft drinks business had acted as a deal repellant, a proverbial poison pull for any and all corporate predators.

If the price is right, the Cadbury CEO will do a deal. However, I doubt if he will recommend a sale of Cadbury to Kraft much below £8. Stitzer’s strategy is clear. He is biding for time with his restructuring program, hoping that either Kraft will boost the cash component of its bid or, hopefully, Nestle – Hershey will emerge with a counter-bid in a bidding war.

It is only imperative to understand the strategic options that face Irene Rosenfeld, Kraft CEO. Kraft is a $40 billion sales American packaged food colossus, with its Jell O, Oreo cookies, Ritz crackers, Oscar Mayer hot dogs and Maxwell House coffee brand. Yet it has nowhere near the presence in emerging markets, particularly, India, commanded by Cadbury, with its imperial heritage as the chocolatier to Queen Victoria’s British Raj. The North American market, home to two third of Kraft global sales, is mature, saturated, low growth. Kraft needs a transformational deal to overtake Nestle as the world’s leading constellation of packaged food brands. This is the reason Kraft bought Danone’s global biscuit business for $7 billion. Cadbury, with one third of its sales from emerging markets and a pure play confectionary play, is a natural target for Kraft. A Kraft – Cadbury combination would also be able to compete with Mars, which shelled out $23 billion for Wrigley only a year ago.

Yet Kraft has tangible financial constraints in its bid for Cadbury. The Danone’s deal has bequeathed Kraft with a Godzilla gross debt, as high as $20 billion, half its current market value. This is the reason it has offered only 300 pence in cash because a higher cash bid could well be a catalyst for a credit rating downgrade, even though the bank syndicate could well finance the existing bid.

Lord Keynes once observed that bull markets were triggered by the “animal spirits of capitalism”. So true. Merger deal mania has definitely boosted the global markets. Cadbury-Kraft, Vivendi’s Brazilian telecom, the oil patch’s BJ – Services, the Kuwait telecom Zain.

The takeover bids of autumn 2009 are an echo of the pre-Lehman world of finance we once knew and so recklessly lost.

Views expressed by the author are his own and do not reflect the newspaper’s policy.

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