Kraft Launches Hostile Bid For Cadbury - Is That The Final Offer?

Kraft Foods Inc. (KFT) yesterday (Monday) refused to sweeten its $16.4 billion offer for Cadbury PLC (CBY).

Instead, the North American food giant repeated the terms of its original offer, which Cadbury rejected two months ago. Kraft will now put its bid directly to Cadbury shareholders, setting the stage for a battle that could last months.

Cadbury swiftly rejected the bid, saying the offer is now worth less than the initial proposal, which had already undervalued the company.  Kraft’s bid is now worth 4% less than the original offer, and 6% below the current stock price, because Kraft shares have lost some of their value.

When Cadbury rejected the initial offer in September, the company said it preferred to remain independent, and called the original proposal from Kraft Chairman and Chief Executive Officer Irene Rosenfeld an “unappealing prospect” from a “low-growth” conglomerate.

The formal bid values Cadbury shares at $16.44 billion (9.8 billion pounds) or 713 pence a share, compared with $17.0 billion (10.2 billion pounds) or 745 pence a share, at the time of Kraft’s September offer.

“I’m not sure what kind of appetite Cadbury holders have to hold on while these two slug it out for the next six months,” William Hobbs, who helps manage $224 billion in assets, including Cadbury stock, at Barclays Wealth in London told Bloomberg News. “Anything under 800 pence is still a pretty chunky discount to what we could get.”

The deal would make Kraft, the maker of Oreos and Ritz crackers, the world’s largest confectioner, surpassing privately owned Mars Inc.  Acquiring Cadbury, the London-based maker of Dairy Milk chocolate, would give Kraft entry into untapped emerging markets and shore up its brands in the United Kingdom.  The merger would be the largest cross-border acquisition of the year.

Kraft’s bid for Cadbury had been expected after the U.K. Takeover Panel ruled that Kraft either had to make a formal bid by 12 :00pm Eastern Standard Time Monday, or refrain from any other overtures for six months.  Kraft now has 28 days to mail the official offer documents to Cadbury shareholders, which triggers a 60-day bid time limit according to U.K. rules.

Kraft’s Rosenfeld has dug in her heels on the price, repeatedly insisting she won’t overpay for Cadbury.  Conversely, Cadbury’s CEO Todd Stitzer has stated that a deal with Kraft makes no strategic sense and likes Cadbury’s prospects better as an independent entity.

“Kraft’s offer does not come remotely close to reflecting the true value of our company, and involves the unattractive prospect of the absorption of Cadbury into a low-growth conglomerate business model,” Cadbury’s Carr told Reuters.

Most analysts seem to agree with Carr’s assessment and think Rosenfield will eventually have to increase its bid in order to finalize a deal.

“There’s a good chance they (Kraft) will have to increase this a little bit. I still think the cash side is likely where they have the opportunity to make it more attractive to Cadbury shareholders,” Matt Arnold at Edward Jones told Reuters.

This is not likely to be the final offer from Kraft, a source familiar with the situation told Reuters.

“This just starts a new clock ticking. Today’s announcement is just the beginning of a new phase,” the source said.

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