Global Economics

Cadbury Says It Has Rival Suitors to Kraft


The British candymaker raised its financial targets on Dec. 14 and again mocked a hostile takeover attempt from Kraft, saying that other bidders are in the wings

By Andrew Cleary

(Bloomberg) — Cadbury Plc (CBY), fighting a 10.4 billion-pound ($16.9 billion) hostile bid from Kraft Foods Inc. (KFT), said it has received approaches from rival suitors and raised forecasts for profitability and sales.

The U.K. maker of Dairy Milk chocolate and Trident gum has been contacted by a number of people about "possible business combinations," Chief Executive Officer Todd Stitzer said on a conference call today, without identifying the parties.

Kraft's offer is "contemptuous" of Cadbury's "inherent value," Chairman Roger Carr said in a presentation to investors. The candy maker said the operating margin, its most important performance measure in a five-year turnaround plan, will widen to between 16 percent and 18 percent by the end of 2013, and increased its sales forecast for the same period.

"Kraft's offer is ludicrously too cheap — if they want to be taken seriously they need to up their bid," said John Haynes, who helps manage 12 billion pounds including Cadbury shares at Rensburg Sheppards Plc in London. "These are achievable and sustainable targets, and they show Cadbury is an asset that deserves a significant premium. The more time that elapses, the easier job Cadbury will have defending this."

Kraft's cash-and-stock bid values the 185-year-old chocolatier at 727 pence a share. Shares of Cadbury, the world's second-largest confectionery maker, rose 3.5 pence to 794 pence as of 12:28 p.m. in London, 9.2 percent more than the value of the bid, which has declined as Kraft's shares have weakened.

Reviewing Options

Hershey Co. and Ferrero SpA have said they are reviewing options for Cadbury, though neither has made an offer. Hershey and the charitable trust that controls it are close to deciding on whether to make a solo bid, the Wall Street Journal reported last week, citing several people familiar with the matter. Hershey is said to have been in contact with Nestle SA about Cadbury, two people familiar with the talks have said.

"It's one thing for Cadbury to say no to one bidder, but it gets really hard when you've got multiple bidders as it tends to produce a better price for shareholders," said Bob Profusek, a mergers and acquisitions partner at law firm Jones Day in New York. "I can't think of a situation where a target has stayed independent where there was more than one credible bidder."

Cadbury has not received a "fully financed, compelling offer" from any bidder, Carr said. "Others may yet choose to enter the fray," he said, adding that were that to happen "it is the offer, not the bidder, that would determine the outcome."

'On the Cheap'

Kraft has until Jan. 19 to raise its bid, and until Feb. 2 to gain acceptance from a majority of Cadbury investors. Stitzer said today he wasn't worried about a shareholder backlash if Kraft, or any other bidder, walked away from Cadbury.

"Kraft is trying to buy Cadbury on the cheap to provide much needed growth to their unattractive low-growth conglomerate business model," Carr said in the statement. "Don't let Kraft steal your company with its derisory offer."

Cadbury's previous forecast was for profitability to reach a "mid-teens" percentage by the end of 2011. The candy maker said it expects emerging markets such as India to drive sales, lifting so-called organic revenue growth to between 5 percent and 7 percent annually over the next four years.

Cadbury today repeated its prediction for 2009 sales growth "around the middle" of a 4 percent to 6 percent range at constant exchange rates, and for operating margin improvement of "at least" 1.35 percentage points.

Emerging Markets

"Were we to take all these targets at face value then Cadbury might be worth something close to a 675 pence range in the absence of a bid from Kraft," Charlie Mills, an analyst at Credit Suisse AG in London, said in a note to clients today.

Analysts at Icap Plc, Numis Securities Ltd. and Charles Stanley expressed skepticism over how Cadbury would achieve some of its new growth targets. The margin goal is "extremely bullish" and implies annual improvement at about twice the level of "market consensus" said Andy Smith, co-head of equities at Icap Plc in London.

Cadbury also said today that sales of gum, chocolate and candy all increased in October and November. Emerging markets including India and South America showed "strong momentum," while the release of Trident Layers gum in the U.S. helped build market share, the company said.

Emerging markets will grow sales at a quicker pace than the company average over the medium-term, with organic revenue to rise by 10 percent to 12 percent annually, Stitzer said. The CEO plans to make "bolt-on" acquisitions in emerging markets of between 200 million pounds and 300 million pounds, he said. There are no plans for any "blockbuster" acquisitions, he added.

Cash Flow

Kraft has cited that prowess in emerging markets as one of the rationales for its bid, which it has said can deliver $625 million of annual savings within three years. Cadbury expects emerging markets to be 45 percent of the candy market by 2013. The company controls 70 percent of the Indian chocolate market.

Gum sales will expand faster than chocolate or candy, Stitzer said on a call. Developed markets will grow at a pace of 3 percent to 4 percent a year, according to the company.

Cadbury said dividend payments would increase by a "double digit" percentage annually from 2010.

To contact the reporter on this story: Andrew Cleary in London at acleary7@bloomberg.net.


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