Kraft may finance $8 billion for Cadbury bid
Kraft Foods Inc., the world's second-largest foodmaker, is in talks to arrange about $8 billion of financing for its bid to buy candy maker Cadbury Plc, according to two people with knowledge of the matter.
Citigroup Inc. and Deutsche Bank AG are working on setting up debt financing to cover about half of the 9.84 billion-pound ($16.3 billion) offer to buy Cadbury, said the people, who declined to be identified because the talks aren't public. The financing would consist of a bridge loan to be repaid with the proceeds of an investment-grade bond offering, one of the people said. Officials from the two banks declined to comment.
Kraft, based in Northfield, may have to sweeten its offer to woo Cadbury after the confectioner rejected the initial bid as too low, said Brian Weddington, a senior analyst at Moody's Investors Service. A higher bid may put pressure on its long-term credit rating of Baa2, two levels above junk. Kraft has about $19 billion of bonds outstanding.
"Any follow-up offer by Kraft would likely involve a higher price," Weddington said in a statement yesterday. "The increased leverage that would result under the proposed transaction would be considerable."
Kraft is working with credit companies to maintain investment-grade ratings, Chief Executive Officer Irene Rosenfeld said yesterday on a conference call. Kraft has about $1.25 billion of bonds maturing by August 2010, according to data compiled by Bloomberg.
"We do not expect that financing the proposed offer will be an issue," Lisa Gibbons, a Kraft spokeswoman, said in an e- mail. She declined to discuss specifics of the financing.
Lower Ratings?
Moody's Investors Service said yesterday that if it did lower Kraft's Baa2 long-term credit rating, the downgrade would probably be by one level. That would keep the company's debt at investment grade. Standard & Poor's also said it may reduce Kraft's long-term credit and senior unsecured debt ratings.
"The substantial incremental debt that would be added to Kraft's balance sheet to fund the proposed transaction will weaken key credit metrics below our expectations at the current rating," Mark Salierno, an S&P analyst, said in a statement.
The current offer values the maker of Dairy Milk chocolate and Trident chewing gum at 720 pence a share, based on Kraft's closing price today. Kraft plans to offer 300 pence in cash and 0.2589 new Kraft share per Cadbury share.
Cadbury Debt
The cash offer totals $6.77 billion, based on the number of Cadbury shares outstanding. The confectioner had about $2 billion of long-term debt as of December 2008.
The U.S. foodmaker rose 40 cents to $26.85 at 4:15 p.m. in New York Stock Exchange composite trading. The stock is unchanged this year. Cadbury traded above the offer price for a third day today, falling 1 penny to 785 pence in London. The stock jumped 38 percent to 783 pence on Sept. 7.
The purchase would create a company with about $50 billion in annual revenue and give Kraft access to emerging markets and products to complement its line of cookies, powdered drinks and dairy foods.
"We feel quite comfortable with the equity components as we plan to issue equity into the transaction," Chief Financial Officer Tim McLevish said on the call yesterday. "That will enable us to fund the deal with internal cash and additional debt and keep us with an investment-grade rating."
Even with a "moderate" increase to the bid, the company will likely keep its investment-grade rating, William Nonneman, an analyst at Barclays Capital in New York, said in a report Sept. 7. That means obtaining debt financing shouldn't be difficult for Kraft, he said in a telephone interview yesterday.
Sitting on Cash
"Money managers are sitting on a lot of cash and are saying they can't source enough high-quality bonds as they want," he said. Similar to Leuven, Belgium-based Anheuser-Busch InBev NV, "this would be a firm that is likely to be around a long time and viewed as an attractive client to banks and an attractive credit to bondholders."
The foodmaker's 6.125 percent notes due in 2018 fell 1.73 cents to 105.8 cents on the dollar to yield 5.3 percent, according to Trace, the bond-pricing system of the Financial Industry Regulatory Authority.