The proposed transaction shows that several things have occurred in the last month that will revive the comatose M&A markets.
Kraft (KFT) clearly thinks it will have access to capital to close the transaction. Its market cap is $41 billion so a $17 billion deal will probably not be easy to digest. Kraft has less than $2 billion on its balance sheet and $18 billion in long-term debt. It must believe big financial firms have developed a new appetite for funding transactions which are large and somewhat risky.
The other reason that M&A may be experiencing a resurrection is that the recession has kept earnings at many companies low and their stock prices down. Cadbury still trades well under where it did a year ago. Kraft must believe that its can take out redundant expenses in a buyout and that Cadbury’s fortunes will improve with the economy. Given the leverage the deal might involve, that is quite a risk.
Douglas A. McIntyre
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