Why the Cadbury Deal Matters

The famous British candymaker is the world's No. 2 producer of chocolate and gum. That's why rivals Kraft, Hershey, and Nestlé are circling

By Mark Scott

Like kids fighting for left-over Halloween candy, the world's largest food companies are battling to take over British chocolate-maker Cadbury (CBRY.L). Kraft (KFT), Hershey, Italy's Ferrero, and even European giant Nestlé (NESN.BE), have been linked to the world's No. 2 confectionery company. That's not surprising: Everyone wants to lay claim to the fast-consolidating global market for sweets.

The stakes couldn't be higher. According to market researcher Euromonitor, the worldwide confectionery business is highly fragmented between well-known names. Mars, based in McLean, Va., which bought gum maker Wrigley last year for $23 billion, tops the global rankings, followed by Britain's Cadbury. Food giants Nestlé and Kraft finish third and fourth, respectively. And privately held Hershey and Ferrero round out the top six.

By pocketing Cadbury's candy and gum businesses, particularly in emerging economies, any potential acquirer would quickly become the world's biggest candymaker. It would gain access, of course, to Cadbury's dominant position in Britain—the company's large and profitable but slow-growing home market. But the deal also would instantly cement the newly merged firm's foothold in developing countries such as India, where consumers' insatiable appetite for candy is fueling double-digit market growth.

Frantic Race

"Companies are going after Cadbury as part of a defensive move," says Euromonitor analyst Ildiko Szalai in London. "No one wants to be left behind by consolidation, so the big players are all weighing up their options."

As the only company, so far, to put forward a bid, Kraft remains the favorite to land the British candymaker. Under its Nov. 9 proposal, which Cadbury rejected as "derisory," Kraft tried to entice shareholders with a cash-and-stock offer valued at $16.5 billion. And on Nov. 23, rumors abounded the U.S. food giant would increase its bid to win over investors.

Despite concerns the takeover would overstretch Kraft's finances, the Cadbury deal would help the U.S. company keep pace with rival Nestlé, which already has a well-established chocolate business. Kraft reported a 5.7% decline in third-quarter revenues to $9.8 billion, so it would benefit from Cadbury's fast-growing emerging-market business, which recorded a 16.1% revenue increase last year (the latest figures available) vs. 5.2% in the Western world.

"Kraft continues to be the leader of the pack for Cadbury," says Jeremy Batstone-Carr, director of private client research at stockbrokers Charles Stanley (CAY.L) in London.

Catching Up

The U.S. food giant may be ahead, but others are nipping at its heels. Italy's Ferrero, which owns brands like Kinder, Nutella, and Tic Tacs, has expressed interest—and could team up with Hershey to bid for the British candymaker. Euromonitor's Szalai says the privately held company has a large footprint across continental Europe, and recently expanded into Russia, where it now holds a 4.3% market share.

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