Kraft (NYSE:KFT) made a remarkably clever move in its pursuit of Cadbury (NYSE:CBY), but it may be too little too late. The US foods company sold its North American pizza business to Nestle for $3.7 billion. Kraft will use the proceeds of that sale to increase the cash portion of its 10.2 billion pound offer for Cadbury. But, Kraft will not raise the total amount of its offer, and Cadbury immediately rejected the new overture
The Kraft bid values Cadbury at 738 pence on a per share basis. Cadbury trades at 790 pense, a sign that investors still believe that another company will make an offer for the UK firm or that Kraft will increase its offer again.
Kraft is effectively killing two birds with one stone. Its transaction with Nestle takes Nestle out of the bidding for Cadbury, which makes an alternative offer for the UK company less likely. The only other bidder is probably Hershey (NYSE:HSY), which has taken its time to show its hand.
Kraft’s sale of its pizza business and the increase of the cash portion of its Cadbury offer also makes the offer “less risky” because it lowers the amount of debt Kraft would have to add to its balance sheet to complete a Cadbury buyout.
The flaw in Kraft’s move is simple. It has not raised the total value of its bid, which gave the Cadbury board and management a reason to reject Kraft’s offer as it did the first one. The fact that Kraft has raised the amount of cash that it will put into the transaction may be viewed as meaningless to large Cadbury shareholders who want the total offer for the company to be increased if they are to vote their shares in favor of it.
Kraft almost certainly should have raised the total amount of its offer closer to the 790 pense where Cadbury trades. That would have given it the opportunity to go to Cadbury shareholders with the case that they are being given full value, at least as far as the stock market values the UK firm.
Kraft’s revised bid is likely to fail because it is still too cheap to entice Cadbury’s board and shareholders to sell the company. And, the Cadbury board has already made its first move to undermine Kraft’s strategy.
Douglas A. McIntyre
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