Mergers

Cadbury Rejects $16 Billion Kraft Bid


Kraft Foods will likely have to up the ante if it hopes to acquire British confectionery and chocolate maker Cadbury, maker of the iconic Dairy Milk bar. On Sept. 7, Cadbury rejected a surprise $16.7 billion takeover bid from the U.S. food giant on the grounds that it fundamentally undervalues the British company, though Kraft's offer was 31% above Cadbury's closing price on Sept. 4.

In a statement to the London Stock Exchange, Cadbury (CBY) says: "The board is confident in Cadbury's standalone strategy and growth prospects as a result of its strong brands, unique category and geographic scope."

Kraft (KFT), the world's second-largest food company, with $42 billion in annual revenues, says the union would strengthen its position as a "global powerhouse in snacks, confectionery and quick meals." Kraft says the deal will create a company with around $50 billion in annual sales and leading positions in key developing markets, including India, Mexico, Brazil, China, and Russia.

other bidders could emergeCadbury's shares soared nearly 40% on the news, prompting many to speculate that Kraft's offer may draw other potential bidders into the fray. Switzerland's Nestlé (NESN.F) and Hershey (HSY) in the U.S. could counterbid with Nestlé taking gum and Hershey taking chocolate.

Analysts have speculated about a union of Kraft and Cadbury since 2007, when rival Mars bought Wrigley for $23 billion. A merger would place the enlarged Kraft on equal competitive footing with Mars, with both companies having a 15% of the world confectionery market.

Analysts at Evolution Securities (EVG.L) said the takeover of Wrigley by Mars created a global confectionery "powerhouse" and "made a deal for Cadbury inevitable as it fundamentally changed the confectionery economic landscape." In April 2008, Cadbury spun off its U.S. drinks division, including brands such as 7-Up, Canada Dry, and Mott's apple juice, into the separately traded Dr Pepper Snapple Group (DPS) to focus on confectionery—and analysts renewed their predictions that the freestanding candy company could become a Kraft takeover target.

cadbury is in fast-growing emerging marketsGiven the swift rejection, Kraft likely will be forced to raise its offer. Now mainly focused on the U.S. market, Kraft is facing intense competition from major retailers and private-label products. Acquiring the 178-year-old Cadbury would take the company into faster-growing emerging markets. In 2003, Cadbury briefly became the world's largest confectionery player when it snapped up a number of gum brands, including Trident. Emerging-market sales now account for around 40% of Cadbury's revenues.

In a letter to Cadbury Chairman Roger Carr, Kraft Chairman and CEO Irene B. Rosenfeld said: "We believe that Cadbury's prospects, ability to fully realize operational efficiencies and capacity to invest are necessarily constrained given its limited scale and scope relative to larger global competitors. We see few catalysts for sustained future value creation for Cadbury as a standalone entity."

Rosenfeld ended her letter saying: "We trust our proposal makes clear our level of seriousness and enthusiasm for pursuing this opportunity. We are willing to commit substantial time and financial resources to do so." To show how serious it is, Kraft may have to sweeten its offer.

For a look at Cadbury's product line before and after its 2008 de-merger, see our slide show.
Kerry_capell
Capell is a senior writer in BusinessWeek's London bureau

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