Cadbury investors consider Kraft's $16 million purchase bid

Cadbury Plc investors including Mario Gabelli support the logic of Kraft Foods Inc.'s $16 billion bid for the British candy maker. They just want Kraft Chief Executive Officer Irene Rosenfeld to pay up.

Kraft's cash-and-stock offer for the London-based maker of Dairy Milk chocolate is currently worth 706 pence a share. Cadbury stock, which traded at 781 pence at 9:30 a.m. in London today, has held as much as 10 percent above that bid, even as Kraft shares declined since the U.S. company disclosed its interest on Monday.

"All we want is a kiss from Irene," said Gabelli, whose Rye, New York-based Gamco Asset Management Inc. owned almost 2.8 million American depositary shares of Cadbury and 1.1 million Kraft shares as of June 30, according to filings. "They just have to put a little more money on the table."

Cadbury's price tag may soar to 937 pence per share for the successful bidder, or 12.8 billion pounds ($21.3 billion), according to the average estimate of six analysts surveyed by Bloomberg. Rosenfeld, which said this week that Kraft won't jeopardize its investment-grade credit rating by taking on too much takeover debt, may not go that high.

Still, Rosenfeld expressed determination to engage Cadbury in talks, aiming to secure Northfield-based Kraft's non-U.S. growth. She's being advised by Lazard Ltd., the securities firm led by Bruce Wasserstein, as well as Centerview Partners and Citigroup Inc. They will face off against Cadbury advisers Goldman Sachs Group Inc., UBS AG and Morgan Stanley.

"This is a very good deal for Kraft, and this is a very good deal for shareholders of Cadbury, like us, that like Kraft," said Gabelli, 67, whose mutual-fund firm managed about $21 billion as of June 30.

Gabelli is known for buying stocks he thinks will become takeover targets, as well as writing his 1988 "Magna Carta of Shareholder Rights."

"We are delighted she put the transaction into the public domain," he said of Rosenfeld. "Now let the auction begin."

If an alternative bid to Kraft's emerges, analysts at Evolution Securities and Panmure Gordon say it may come from Hershey Co. The biggest U.S. chocolate maker could team with Swiss-based Nestle SA, the largest food company, to outbid Kraft and break up Cadbury.

Analysts differ on whether Hershey has the wherewithal to bid, given it's worth half Cadbury's market value and its controlling trust may not want to cede control. A spokesman for Hershey declined to comment, as has Nestle Chief Executive Officer Paul Bulcke.

Even without a counterbid, Kraft may need to stump up more cash to win over Cadbury's British shareholders. Kraft's stock- and-cash proposal may turn off some mutual-fund companies that don't have a mandate to hold U.S. equities.

"The share element is an issue," said Michael Crawford, a fund manager at London-based LV Asset Management Ltd., which has about 7 billion pounds in assets. He said he'd consider keeping Kraft stock received in exchange for his Cadbury shares, though would prefer that Kraft "raise the cash element, and perhaps put another pound on the price."

Across the Atlantic, U.S. Cadbury investors say the global expansion of Trident gum and the confectioner's presence in emerging markets such as India and Brazil, where Kraft is perceived to have been less successful, mean the company deserves to sell for more.

"Kraft can increase its bid and still make the deal attractive for its stockholders," said Dan O'Keefe, who helps oversee $3.4 billion, including Cadbury shares but no Kraft stock, at Artisan Partners LP. "It diversifies its business away from the U.S., where it has a more mature portfolio."

Kraft, the second-largest food company, is in talks to arrange about $8 billion of financing for the bid, according to two people with knowledge of the matter. Kraft, whose credit rating is Baa2, has about $19 billion of bonds outstanding.

Analysts including Sanford C. Bernstein's Andrew Wood have compared Kraft's bid to Mars Inc.'s $22.6 billion debt-financed acquisition of gum maker Wm. Wrigley Jr. Co., which drove Mars past Cadbury as the world's biggest confectioner.

Wood valued that transaction at 19.5 times Wrigley's earnings before interest, tax, depreciation and amortization. Kraft's current bid values Cadbury at much less, or about 12 times ebitda, according to Bloomberg estimates.

"The price they offered is too low," said David Carr, chief investment officer at Durham, North Carolina-based Oak Value Capital Management Inc., which oversees $250 million, including Cadbury shares. "There are not many assets out there like this, and when they become available, they are expensive."

Cadbury's brands, which include Wispa and Caramilk bars, can be as profitable as Wrigley's, according to Carr. He said his Oak Value Fund has almost 6 percent of its assets in Cadbury and has held the stock for four years. "It's too good a deal for Kraft at the current price," according to Carr, who says Kraft should up its bid to 900 pence.

Kraft has rejected comparisons to the Wrigley deal, which was announced in April 2008, before the worst of the credit crunch. Kraft Executive Vice-President Michael Osanloo said "the world has changed dramatically" since then.

A Bloomberg survey showed analysts considered a "fair" bid for Cadbury to be worth 14.7 times ebitda, according to the average of 6 estimates.

Some Cadbury investors have opted not to bet their entire stake on Rosenfeld going that high. Capital Group Cos., the second-largest employee-owned U.S. asset manager, said it sold more than half its Cadbury stake the day Kraft announced its approach.