Marcial: Pros Bet Cadbury Will Melt for Kraft

Analysts think Kraft wants the deal badly and will raise its bid—creating an opportunity for nimble investors

Cadbury—52-week ADR price

By Gene Marcial

Related Items

• Marcial: Is Eli Lilly Ripe for a Rebound?
• Marcial: Pros Turn Cold on California Pizza
• Inside Wall Street

BW's Gene Marcial

Story Tools

• post a comment
• e-mail this story
• print this story
• order a reprint
• suggest a story
• digg this
• save to del.icio.us

How to play the Kraft Foods (KFT) vs. Cadbury (CBY) takeover chess game?

With American Depositary Receipts (ADRs) of Cadbury easing from 52.66 a share on Oct. 22 to 50 on Nov. 12, this is a chance for investors to grab some of the U.K. company. Some pros are betting big bucks that Cadbury will succumb to Kraft's persistent efforts to buy the leading maker of chocolate, gum, and candy. Kraft is one of the world's largest branded food and beverage companies.

On Nov. 13, Cadbury's stock inched up to 51. Cadbury bulls believe the intrinsic worth of the stock is 56 to 59 a share.

It's likely Cadbury's stock may slip again as Kraft continues to take its time before raising the ante in its cash-and-stock bid of £7.14 for each ordinary share, or 47.44 per ADR. Cadbury Chairman Roger Carr called the unsolicited bid "derisory" as he and the board swiftly rejected the offer.

Kraft CEO's "Ultimate Deal"

Don't be puzzled by the way Kraft seems to be pence-pinching in its quest. The endgame is to win Cadbury—at not so steep a price. And some pros believe Kraft will emerge victorious.

"It is the ultimate deal of her [Chairman and CEO Irene Rosenfeld's] career if she wants to push forward Kraft's global reach and much-needed expansion," says Kevin Dreyer, a consumer staples industry analyst and portfolio manager at GAMCO Investors (GBL), which owns nearly 1% of Cadbury's stock.

"Cadbury is a company that Kraft desperately wants not only because of its fast-growing confectionery products but [because of] its geographic fit," Dreyer points out. Among Cadbury's brands: Trident, Dentyne, Halls, and Cadbury.

Cadbury has a big share of the markets in the 60 countries in which it operates, with Britain, Ireland, the Middle East, and Africa accounting for 31% of total revenues, the U.S. and Latin America 27%, Asia-Pacific 25%, and Europe 17%.

What has disappointed investors is Kraft's decision to stay with the original buyout price it offered in September, and worst of all, the implied price is now lower because of the decline in Kraft's stock price.

Prospects for a Sweetened Offer

"While we are somewhat surprised Kraft did not increase its bid, we view this offer as a means to continue the process toward a negotiated transaction," says Dreyer. The offer equates to 11.6 times his 2009 estimated earnings before interest, taxes, depreciation, and amortization (EBITDA) for Cadbury, and 10.6 times his 2010 EBITDA forecast.

Business Exchange

Track and share business topics across the Web.