Why the Cadbury Deal Matters

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A Cadbury link-up could extend Ferrero's business across emerging market, though analysts reckon the company could struggle to finance a takeover. Ferrero typically hasn't expanded through multibillion-dollar acquisitions, and the extra leverage needed to fund a potential takeover could leave the firm exposed to takeover by another party. Analyst Alex Malloy of Credit Suisse (CS) figures a combined Ferrero-Hershey bid could raise roughly $12.5 billion by increasing the debt-to-capital ratios at both companies. But that still wouldn't match Kraft's existing offer, and would put extra pressure on both firms' finances.

A similar problem confronts Hershey, which also has expressed interest in pursuing its own takeover of Cadbury. The merger certainly would diversify Hershey's business, which currently derives 86% of its revenues from North America. The U.S company also holds the license to produce Cadbury's products in the America. The potential link-up would give the combined candymaker a dominant position in the Americas, Europe, and across much of the developing world.

Yet Charles Stanley's Batstone-Carr reckons Hershey may fall short if it tries to fund the deal on its own. The company's complex management structure, which gives the Hershey Trust control over one-third of the company's shares and roughly 80% of the voting rights, could make it difficult to tap investors for capital. "It would involve a messy cash-raising exercise, and I don't think they can manage it," he says.

Coming Up with the Money

To make the deal work, analysts speculate that Hershey might team up with Nestlé. Under European Union antitrust law, the Swiss food giant, which already owns candy businesses across the continent, likely would have to divest assets if it made a solo bid for Cadbury. But under a potential joint takeover, Hershey could walk away with the chocolate business, while Nestlé pocketed Cadbury's gum operations. Financing the bid also shouldn't be a problem after Nestlé finalizes the sale of its 52% stake in eye-care firm Alcon (ACL) to Novartis (NVS) for up to $28 billion. The companies declined to comment on the takeover rumors.

With so much attention focused on Cadbury, analysts expect a deal by early 2010. And while the British candymaker is adamant it can continue on its own, others warn it won't be able to compete in the consolidating global confectionery market. "For now, Cadbury may be able to defend itself," says Charles Stanley's Batstone-Carr. "But sooner or later, its performance will start to struggle."

Scott is a correspondent in BusinessWeek's London bureau.

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