* Cadbury rejects 745 pence per share cash-and-shares bid
* Kraft still hopes to agree deal; higher offer seen
* Cadbury shares up 38 percent, peak near record high
* News raises supports hope of M&A revival
(Adds background on financing in paragraphs 11-12, details on
Hershey in 21-25)
By Paul Hoskins and Victoria Bryan
LONDON, Sept 7 Kraft Foods KFT.N said it was
intent on pursuing Britain's Cadbury CBRY.L, which soared in
value after it snubbed a premium-rich bid from the U.S. group,
reinforcing hopes of a broader-based pick-up in merger
Analysts said North America's biggest food group might have
to raise its 10.2 billion pound ($16.7 billion) offer by up to
40 percent after shares in the world's No.2 candy and chocolate
maker increased by almost half on news of the approach.
The company's biggest institutional shareholder, Legal &
General Investment Management, said in a statement that it
thought the approach materially undervalued Cadbury, and
supported management in opposing the deal.
According to Reuters Estimates, Legal & General has a 5.4
percent stake in the company.
Cadbury's stock closed up 38 percent at 783 pence, having
peaked close to its all-time high at 808 and well ahead of
Kraft's 745 pence-per-share pitch.
The price spike reflected analysts' views the combination
would be a success, chances of a counterbid and bankers' hopes
that rallying equity markets and a brighter economic outlook
were encouraging companies to view mergers and acquisitions
(M&A) prospects with greater confidence.
"If the deal gets done, it sends a positive signal about
the M&A market. There is not that much more consolidation to be
done in confectionery, but a successful outcome would make
global consumer companies more likely to pursue their own M&A
targets," said a senior banking source.
The two firms' product portfolios are largely
Top brands at Cadbury, which had sales of 5.4 billion
pounds ($8.8 billion) last year, include Bassett's Liquorice
Allsorts, Maynards Wine Gums and trademark chocolate bars while
Kraft, which had turnover of $42 billion, is known for Maxwell
House coffee, Oreo cookies and Ritz crackers.
Kraft's cash-and-shares offer, outlined in a letter on
August 28, represented a 31 percent premium to Cadbury's
closing share price from last Friday.
Kraft said on a conference call it was comfortable it could
fund the cash part of the proposal with existing cash and debt.
A source familiar with the situation said that Kraft has
already had some discussions about financing the cash component
of the deal and did not foresee that getting financing would be
The timing of the proposal was partly driven by the
improvement in the debt markets, particularly for investment
grade financing, that source said, and the company's
Kraft has been cutting costs and overhauling its portfolio
over the past several years.
"Our initial view is that this represents a competitively
pitched offer, but something less than a knockout blow," said
Investec analyst Martin Deboo.
"For a useful comparison, we think that investors need to
look as far back as Nestle's acquisition of Rowntree in 1988,
where we recall that the exit premium was in excess of 100
percent of Rowntree's pre-speculation share price."
Panmure Gordon & Co recommended investors hold out for at
least 800 pence a share and Bernstein Research suggested
between 855 and 1,070. [ID:nL7336790]
One top 20 Cadbury investor who declined to be named said
benchmarks set by other deals indicated Kraft would need to
offer at least 10 percent more, "and you could be looking at 20
to 30 percent higher."
Kraft offered 300 pence in cash and 0.2589 new Kraft shares
per Cadbury share in the hope it can create a "global
powerhouse in snacks, confectionery and quick meals."
Consolidation hopes helped drive shares in the food and
drink sector as a whole up 2.35 percent .SX3P, outperforming
a 1.3 percent rise for European blue-chips. [ID:nL7622634]
Cazenove analysts said Nestle might make a counterbid for
Cadbury, perhaps in a joint approach with U.S. chocolate group
Hershey Co (HSY.N). Nestle CEO Paul Bulcke declined to comment
directly but said the company had no major acquisitions planned
though was always open to opportunities. [IDnL7725276]
Hershey spokesman Kirk Saville declined comment on
potential Hershey interest for Cadbury, citing company policy
to not talk publicly about merger and acquisition issues.
Hershey and Cadbury have a licensing agreement that lets
Cadbury sell some Hershey products, including York peppermint
patties and Mounds candy bars worldwide, while Hershey makes
Cadbury chocolates in the United States.
Hershey also has a licensing agreement with Nestle to make
Kit Kat bars and Rolo candies in the United States.
The Wall Street Journal reported that Hershey Co. is
unlikely to stand by and let Kraft or another company buy
Cadbury, citing a person familiar with Hershey's thinking.
"Hershey recognizes that Cadbury is the last major
confectionery company potentially available and, as such, is
likely to make some response" to Kraft's... bid for Cadbury,
the paper cited the person saying.
Cadbury said it believed Kraft's approach fundamentally
undervalued the British company. [ID:nPRr7C11Aa]
Northfield, Illinois headquartered Kraft said it was not
ready to throw in the towel, however, describing itself as
"committed to working toward a recommended transaction and to
maintaining a constructive dialogue."
"We think (a deal) makes perfect sense ... subject to the
right price for both parties," Bernstein analysts wrote.
A debt market source said Kraft was most likely to finance
a bid with a bridge loan via the bond markets. "We've seen
sizeable acquisitions this year for Merck and Pfizer done this
way," the banker said.
Global merger and acquisition activity fell 44.5 percent to
$872.5 billion in the first half of 2009, according to Reuters
data -- the lowest first half volume since 2003 and the
steepest decline since 2001. [ID:nN24362488]
Lazard is acting as lead financial adviser to Kraft with
Centerview Partners, Citigroup and Deutsche Bank also
Goldman Sachs, Morgan Stanley and UBS are working with
Cadbury, banking sources said.