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.

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