Cadbury to Kraft: We choose to remain independent

In a nutshell, this letter states that Cadbury remains focused on being an independent confectionary business, highlighted by the several acquisitions it has made throughout the years, as well as the de-merger of it beverage business.  Kraft, being a conglomerate, fails to live up to the British firm’s objectives.  Here’s the entire letter sent by the CEO of Cadbury to Irene Rosenfeld, Kraft’s CEO, as posted on Cadbury’s website (emphasis mine):

“Dear Irene
In my letter of 31st August, I informed you that the Board had rejected your unsolicited proposal on the grounds that it is unattractive and fundamentally undervalues Cadbury. Under your proposal, Cadbury would be absorbed into Kraft’s low growth, conglomerate business model, an unappealing prospect which contrasts sharply with our strategy to be a pure play confectionery company. I also re-affirmed the Board’s confidence in our future prospects as an independent company. There is nothing in your letter dated 7th September, or your various announcements on and since that date, to change our view.

I would like to take the opportunity to expand on some points I made in my letter.

Over the past few years, Cadbury has completed a major corporate transformation through the acquisition of Adams and the demerger and sale of our beverage businesses. The disposal of Beverages provides the clear business focus we believe essential to achieve outstanding performance.

We have created a pure play confectionery business with strong brands occupying leading market positions in both developed markets and high growth emerging economies – a business of considerable inherent value, impossible to replicate and with a unique position in the global confectionery market. We have a clear set of targets, a track record of delivery accepted by the market and value enhancing plans to further exploit our proven growth platforms.

We have demonstrated through our performance to date that we have the scale, capabilities and resource to deliver on our commitments to shareholders. Since the Adams acquisition, our confectionery business has delivered top line growth of over 6%, we have increased our global market share by over 100 bps and generated comparable margin growth of over 200 bps, all while materially increasing spend on marketing and science and technology to drive innovation.

We have been able to demonstrate both organic and inorganic growth. The acquisition of Adams, together with more recent acquisitions, including Intergum and Sansei, provided scale and new growth opportunities in attractive product areas of gum and candy together with exposure to emerging markets that complemented our powerful British Commonwealth heritage.

Our integration of Adams achieved combined cost and revenue synergies of 14% by the end of 2006. We achieved this performance by reinvigorating sales growth, re-stimulating the acquired brands through increased marketing investment and widening the product range through greater commitment to product innovation.

We understand the attraction of our business and fully appreciate the value and benefits it would offer to those looking for superior growth and exposure to our attractive product segments and markets. Equally, the quality of our management, the momentum of our business, the power of our brands, the strength of our market positions and the spread of our global footprint continue to underpin our belief in the business and its prospects as an independent entity.

Finally, I would emphasise that the delivery of value to our shareholders remains at the top of our agenda. Your proposal is for Cadbury shareholders to exchange shares in a pure-play confectionery business for cash and shares in Kraft, a company with a considerably less focused business mix and historically lower growth. In addition, the proposal is of uncertain value for Cadbury shareholders as underlined by the movement in the Kraft share price since your announcement. Your proposal fundamentally fails to reflect the current value of Cadbury as a standalone business, its growth prospects and the potential synergies of a combined entity.

We are committed to the delivery of optimum value to our shareholders and our Board remains convinced that this is achieved through continuing to deliver our standalone pure play confectionery strategy.

Yours sincerely
Roger Carr
Chairman, Cadbury plc”

Experts don’t expect Kraft to back off.  Instead, they’re seeing a much sweeter offer than the one proposed.

Sweet talk: On Kraft’s bid for Cadbury

NYT has this article up today on Kraft’s CEO and her successful track record in the past.  That comes amid the story of Kraft’s rejected bid for chocolate-maker Cadbury.  Knowing more about Irene Rosenfeld surely doesn’t significantly improve chances of a successful bid, but it does make others hopeful that eventually this will go through.

The coming battle will certainly test Ms. Rosenfeld’s leadership of the company she took over in 2006, vowing to revive sluggish sales of its brands, which include Oreo cookies, Oscar Mayer lunch meats and Velveeta cheese.

…

Ms. Rosenfeld, who declined to be interviewed for this article, began working for Kraft in the early 1980s. She soon became a marketing manager with responsibility for Kool Aid and helped increase sales, in part by changing television ads aimed at children that featured a rock and roll soundtrack. She had similar success with Jell-O and was later made head of Kraft’s Canadian and then North American divisions.

But she left the company abruptly in 2003. In 2004 she was hired to be chief executive of PepsiCo’s Frito-Lay division. But two years later she returned to Kraft, this time as chief executive. She was named chairman in 2007 and now holds both posts.

Source: NYT

With a rejected bid, others are expecting two alternatives to this M&A activity: either Kraft will pay more, above the 34% premium that was to be given for Cadbury shareholders or other confectionary makers would enter the bidding war.  Names suggested are Hershey and Nestle.  Two pieces from the Wall Street Journal’s Deal Journal blog weighed in on the issue.  The first argued that Rosenfeld shouldn’t pay more than what she offered but the author also believed this is just what might happen.  That said, another Journal blogger believes Hershey just isn’t likely to happen. For several reasons.

Do you want the aggravation of a prolonged fight over Cadbury? Do you want to be known as a CEO who couldn’t get the deal done?

And for what? To save Kraft shareholders an extra one or two billion dollars – monies that will be forgotten by the time the deal actually closes?

It’s hard to resist this thinking. It’s exactly why CEOs overpay all the time. But that doesn’t make it right.

So, Ms. Rosenfeld, consider this. You are the best buyer for Cadbury. You’ve offered Cadbury investors a big 34% premium. You’re paying a 13x EBITDA multiple which is in line with the comparable acquisitions of Pilsbury, Nabisco and Ralston Purina earlier this decade. Plus you’ll be adding jobs to the UK.

Why pay more?

Link to the post here.

The thing is, without higher premium to the bid, the Kraft-Cadbury transaction might just stall for as long as the Microsoft-Yahoo deal did.  Without it, I don’t see Cadbury’s CEO giving in.  And I’m not sure how Kraft walking away, which in itself is probably a remote possibility, would threaten the chocolate maker.  So I think I agree with the author above.  I believe Kraft will overpay.  But if anything, it shouldn’t be at a much higher price.  However, given the additional product line from Cadbury, Rosenfeld might just succumb to pressure.

Now, on why Hershey won’t be the winner, let alone a bidder:

The biggest obstacle is that the Hershey family trust, which controls 80% of the voting stake in the Pennsylvania chocolatier, isn’t likely to agree to any deal for Cadbury that would significantly dilute its stake.

To avoid the dilution issue, Hershey would likely have to offer more cash than stock. But where is Hershey going to find that cash? The company, which has a market value of $8.8 billion, would likely have to take on loads of debt to come up with enough cash to top Kraft’s offer. Kraft has a $39.2 billion market value.

Plus, combining two big chocolate-makers doesn’t quite make sense.  Usually, the point of acquiring another company is diversification but the combination of Hershey/Nestle and Cadbury just doesn’t fulfill that.  Moreover, it might attract regulatory/some sort of antitrust attack.

Go to the Hershey blog post here.

QOTD

In relation to the just announced merger between Disney and Marvel, I found this line from Salon’s Andrew Leonard to be quite funny:

So what’s next? The X-Men join forces with Hannah Montana to rid the world of acne? Snow White hooks up with the Incredible Hulk?

Source: Salon

Disney to buy Marvel Entertainment

My immediate thought was Mickey in an Iron Man suit or something to that effect. More adult characters mingling with the kiddies’.

So far the details of the deal: it would be worth $4bn in cash and stock. Marvel shareholders will receive $30 per share and 0.745 Disney share for every Marvel.  The acquisition would see Disney acquire 5,000 of Marvel’s characters.

Courtesy of the Journal:

Disney Chief Executive Robert A. Iger said the deal combines Marvel’s strong global brand–which also includes Captain America, Fantastic Four and Thor, among others– with Disney’s “creative skills, unparalleled global portfolio of entertainment properties, and a business structure that maximizes the value of creative properties across multiple platforms and territories.”

As of this writing, Disney stock is down 1.40% while Marvel’s MVL surges almost 27%.

IBM in an all-cash acquisition of SPSS

In order to meet increased need from its clients to cut costs, IBM announced that it will be expanding into the analytics and information-on-demand side by buying SPSS, the statistics and survey research software maker, in an all-cash transaction that will be worth $1.2bn.  This translates to $50 a share, or 42% premium over yesterday’s close.

More from WSJ HERE or a more extensive report from Bloomberg HERE.

3rd M&A of the week: Gilead acquires CV Therapeutics

Gilead Sciences revealed today its acquisition of cardiovascular drugmaker CV Therapeutics for $1.4bn in cash.  For $20/share, this steps over the $16/share hostile bid of Japan’s Astellas Pharma, Gilead’s Japanese partner.  The deal between Gilead and the maker of Ranexa and Lexiscan marks the 3rd merger in a span ofa few days and the 4th if the Pfizer-Wyeth deal, which transpired during the last week of January, is to counted.  CV Therapeutics was approached by Astellas in November for a potential merger before it pushed the Japanese partner to bring its bid public.  Two weeks ago, a $16/share bid was  made but to no good.

John C. Martin, Gilead’s chairman and CEO remarked: “The acquisition of CV Therapeutics represents a unique opportunity to complement and strengthen our growing cardiovascular portfolio.”

Under the terms of the deal, Gilead will pay $20 in cash for each CV share through a tender offer and after garnering at least a majority of CV shares through the tender, the firm would buy the remaining shares for the same price.

Gilead was advised by Merrill Lynch and law firm Cooley Godward Kronish while the acquired firm was advised by Barclays Capital and Goldman Sachs with the aid of law firm Latham & Watkins.

Roche-Genentech reach $47bn deal

After more than 8 months of negotiation, it has finally come to fruition. Genentech’s independent directors have granted their blessing for the transaction to push through with the new $95/share or $46.8bn deal.  The Swiss drugmaker now takes the remaining 44% it doesn’t already own.  Through the elimination of duplications, the two companies expect to have cost savings of up to $850m a year before taxes.

Triumvirate of Mergers. Oh wait, there’s four of them!

Yesterday was quite special. There were talks about three mergers going on while the markets was open.

It was reported that an agreement about the Roche-Genentech deal is moving closer. From the current 93/share bid by the Swiss drugmaker Roche, the price could potentially move up to 100. Remember that Genentech initially wanted the shares to be sold at 112 each but it seems Roche wouldn’t budge. At the end of the day, the price that was floating was $95, some 2% above the 93 that was reported over the weekend. This deal is more of done than not. Just a little but more tinkering with the price and the talks could be done soon. Very, very soon.

That was all the update I expected to hear upon waking up. But voila, there was another one. And it was similarly from the biotech world. This time, Merck has declared its interest to buy New Jersey firm Schering-Plough for a $41.1bn deal. The agreed upon cash-and-stock deal, which values the latter firm’s shares at $23.61 each, is a 34% premium on Schering’s Mar. 6 closing price. Merck’s CEO Richard Clark said of the deal, “The combined company will benefit from a formidable research and development pipeline, a significantly broader portfolio of medicines and an expanded presence in key international markets, particularly high-growth emerging markets.” The two firms already have a partnership for cholesterol drugs Vytorin and Zetia. But Schering also has a deal with JNJ to market drugs outside the US, which might be endangered if the acquisition pushes through. CEO Clark still defends, “We believe the transaction is structured so that Schering-Plough’s rights are not affected by the merger,” Clark said.

Roche raises its bid for DNA

Amidst the sea of bad news this week, this is perhaps one of the few good news one can take.  Swiss drugmaker Roche first made a bid of $89, rejected in August, to increase its stake in San Francisco-based biotech firm Genentech (NYSE: DNA) , 56% of which it already owns.  Believing it could get a better deal using the recession as an excuse, it brought the bid lower to 86.50 proposing the hostile takeover directly to DNA shareholders.  The twist of events made Roche come back with a higher bid of $93.  It seems that at this price, the chase will soon be over.

“Based on conversations with Genentech shareholders, we believe that there is a strong sentiment to bring this process to a conclusion,” Roche Chairman Franz Humer said in a press release.

Owning 90 percent of the outstanding shares of DNA when the deal is consummated would see Roche make an immediate cash payment equal to the price per share in the offer ($93) and a future cash payment based on a valuation, according to a squeeze-out provision in a Roche SEC filing last month.