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Kraft in waiting game for Cadbury

Source: Reuters - Mon 9th Nov 2009

Kraft Foods is persisting in its waiting game as a deadline for its acquisition of British confectioner Cadbury nears, and many see a formal bid coming in close to its tight first offer.

The North American food group is likely to keep the same terms as its informal offer, which values Cadbury at 10.2 billion pounds before sweetening its bid later, sources familiar with the matter have said,

"We anticipate the bid coming on Monday to kick off the formal takeover process" said one analyst, speaking on the condition of anonymity.

Cadbury early in September rejected the cash-and-share offer, worth 745 pence per share at the time and at 722 pence at current values. At 762 pence on Friday, markets showed they were not expecting a massive extra pay-out from Kraft, led by its determined chief executive, Irene Rosenfeld.

Bankers said that Cadbury was likely to reject a bid worth 745 pence a share or less, arguing that any offer below 800 pence a share would not bring the confectioner into talks.

"Cadbury will emphasise the value of its stand-alone plan. It will argue that it does not need Kraft and that any such offer undervalues its growth prospects" said an investment banker, who is not involved in the deal.

He added that there was a slim chance that Kraft might increase the cash portion of its opening bid.

Under British takeover rules, Kraft needs to put in a formal bid by the close of business on Monday or else walk away for six months. The fact that it is waiting until the last few days shows it believes there are no rival bidders. 

Even after posting weaker-than-expected quarterly numbers and cutting its sales forecast, Kraft reiterated this week that it would not overpay for the British group best known for its Dairy Milk chocolate.

Investors had hoped that stronger quarterly results would bolster the proposal, but shares of Kraft, the maker of Velveeta cheese and Oreo cookies, declined on the news.


Still, views on what Kraft will ultimately pay for Cadbury have drifted down as hopes of a rival bidder have diminished and the value of the bid is not too far removed from some estimates of a stand-alone value for the British group.

"We expect they will raise around 800 pence either from the Kraft offer being formalized or from the stand-alone value if the approach is unsuccessful" said analyst Alex Smith at Nomura, who sees a stand-alone fair value at 777 pence.

The most bullish estimates put forward early in the bidding saga suggested Kraft would pay around 9 pounds a share, while some of the latest views put a maximum bid price at 8 pounds.

Martin Deboo at Investec Securities believes Kraft will only be willing to pay 800 pence. Rosenfeld cautioned this week that she would not overpay for Cadbury and Deboo said the probability of a successful Kraft bid had fallen.

There is now a 40 percent chance of staying independent as against 20 percent earlier, Deboo said.

Pablo Zuanic at JP Morgan said he doubted Kraft would go above 780 pence, but both he and Deboo expect Kraft to push up the cash component of its offer to 50 percent or above, from the original 40 percent cash and 60 percent in new Kraft shares weighting, to win Cadbury. 

This appeared to match Cadbury Chairman Roger Carr's description of Kraft as a "low-growth conglomerate business model" in his September letter to Rosenfeld, when he reiterated why Cadbury was rejecting Kraft's approach.

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