Kraft CEO Rosenfeld advocates offer for Cadbury
NEW YORK -- Kraft Foods Inc. CEO Irene Rosenfeld said Wednesday that she will keep pushing to buy candy maker Cadbury PLC as part of Kraft's focus on higher-margin brands and international markets, but ratings agencies were wary of the deal.
Cadbury, the world's second-largest candy maker, rejected the $16.7 billion cash-and-stock offer, saying it undervalues the company.
But Rosenfeld, speaking at a Barclays Capital conference, reiterated that merging the companies would strengthen Cadbury and boost Kraft's presence in developing countries like India and Mexico where Cadbury has a strong presence.
"The time is right for this combination to happen," Rosenfeld said.
Kraft, the world's second-largest food maker, also said the acquisition could lift its revenue and earnings. Rosenfeld projected long-term growth of 9 percent to 11 percent in earnings per share and at least 5 percent in revenue.
If Kraft succeeds in acquiring Cadbury, their combined revenue would top $50 billion. Northfield-based Kraft's products, such as its namesake cheese, Maxwell House coffee and Oscar Mayer meats, are sold in 150 countries worldwide. Cadbury, whose brands include Dentyne gum and Halls cough drops, spun off its Dr Pepper Snapple beverage group last year.
Rating agencies said combining Kraft and Cadbury makes sense strategically but would significantly increase Kraft's debt. As of June 30, it had $20.2 billion in debt and $1.7 billion in cash, according to Fitch Ratings.
Kraft has been trying to cut its debt since 2007 when it borrowed $7.6 billion to buy Paris-based Groupe Danone's biscuit business. Executives said they are confident they can finance a Cadbury deal without costing Kraft its investment-grade rating.
But Fitch placed Kraft's ratings on "watch negative" Wednesday based on the proposal. The agency said buying Cadbury would strengthen Kraft's platform but increase its debt by at least $10 billion. Fitch said it would limit a potential downgrade to one notch, but that would leave it on questionable ground.
Moody's Investors Service expressed similar concerns Tuesday and put the company's rating on review for a possible downgrade.
Analysts expect Kraft will have to sweeten the deal, likely by offering more cash -- which raises further concerns. Standard & Poor's lowered its opinion on Kraft stock Tuesday to "sell" from "hold," saying the risks of the deal overwhelm any benefits it would bring Kraft.
Chief Financial Officer Tim McLevish said Wednesday that the company expects significant short-term savings from cost-cutting. It already has streamlined production and cut unprofitable brands following its three-year turnaround plan.
Kraft expects operating income margins will rise to the mid-teens by 2011, from 12.3 percent in 2008.
Kraft boosted its 2009 earnings outlook last month after posting an 11 percent increase in second-quarter profit. The company expects earnings of at least $1.93 per share, up from previous guidance of $1.88. Analysts polled by Thomson Reuters expect $1.96 per share.
Mars Inc. is the world's largest candy company, and Switzerland-based Nestle S.A. is the largest food maker worldwide.