Report: Kraft's Cadbury bid based on 'flawed' logic
Kraft Foods Inc.'s unsolicited bid for Cadbury Plc is based on a "flawed argument" that uses a historical valuation, which doesn't fairly value the Dairy Milk maker, Credit Suisse AG analysts said.
Kraft will need to increase its cash-and-stock offer, currently worth 724 pence per share, by 130 pence to get agreement from Cadbury shareholders, analysts including Charlie Mills said today in a note to clients.
Investors "should pay scant attention" to the Philadelphia cream cheese maker's assertion that its bid represents "an attractive multiple," because Kraft is using 2008 earnings multiples, when it says its offer represents 14.2 times earnings before interest, taxes, depreciation and amortization, the Credit Suisse analysts said.
"Investors are by nature forward-looking, and we argue that any decision on the Cadbury shares would be made on the 2010" earnings outlook, said Mills. "True, this is a one-horse race, but Kraft could still lose. Its tactics thus far leave open that possibility."
The cash-and-stock offer was worth 724 pence, or 10.3 billion pounds ($17 billion) at the close of trading yesterday.
"We've heard nothing to make us change our view of what Cadbury is worth," Mike Mitchell, a Kraft spokesman, said today by e-mail in response to the Credit Suisse report.
Cadbury rose 0.5 pence to 785.5 pence in London trading, 8.5 percent more than the value of Kraft's offer. Kraft fell 14 cents to $26.52 at 2:19 p.m. in New York Stock Exchange composite trading.
Analysts' Estimate
The average estimate of 24 analysts surveyed by Bloomberg is for Cadbury's Ebitda to rise to 1 billion pounds this year, a 14 percent increase from 2008. If Kraft paid 14 times 2009 estimated Ebitda, the price would be more than 880 pence per share, according to Mills.
"Kraft's offer not only makes no reference to 2009 outlook, but also ignores that since its offer Cadbury has raised its guidance" for both sales and margin improvements, Credit Suisse said.
Kraft's argument that its offer is also a "substantial premium" to Cadbury's pre-bid share price ignores the fact that the FTSE 100 index has risen 10 percent in that time, the analysts said. Without the bid, Cadbury would probably be trading at about 675 pence, they said.
Credit Suisse has a "neutral" rating on Cadbury shares and a price forecast of 800 pence. It rates Kraft "outperform."
Bid changes coming?
European Union regulators said Wednesday that Kraft Foods Inc. had put forward possible changes to its hostile $16.3 billion takeover of Cadbury PLC to soothe antitrust worries.
The European Commission gave no details when it said it was extending a deadline by 10 working days -- from Dec. 14 to Jan. 6 -- to examine commitments made by Kraft, which is based in Northfield.
By that date, the EU's executive must approve the deal or open an in-depth probe that would examine problems more closely.
Kraft could not be immediately be reached for comment.
Companies often agree to sell off units when regulators identify potential competition problems in certain business sectors or regions of the 27-nation European Union.
London-based Cadbury, the maker of Dairy Milk chocolate and Dentyne gum, plans to publish its formal response to the Kraft deal on Dec. 14.
Kraft, the maker of Oreo cookies, Nabisco crackers and its namesake cheese, took its offer straight to shareholders of the British candy company on Friday. In doing so, it bypassed the Cadbury board, which had already rejected an almost identical offer last month as "derisory."