The afternoon deal: Krafting Cadbury
Munching on a Cadbury Dairy Milk bar, Kraft CEO Irene Rosenfeld says in an interview she expects to complete the takeover of Cadbury within weeks. As Rosenfeld warmly welcomed Cadbury employees into the Kraft fold, Twitter was buzzing with bad chocolate and cheese headlines.
Get the full story here, along with statistics of the combined Kraft/Cadbury company and a timeline of the deal.
Kraft has promised $675 million in annual cost savings from the deal, which will mean cuts to Cadbury’s global workforce of more than 45,000 during the integration process, analysts said.
“We just want a few safeguards. What are they going to do? Kraft has not said anything up until now. The unions have said it is a predatory company,” the BBC quotes a Cadbury employee.
More reaction to the merger:
from Funds Hub:
Trust the Cadbury trustee to get a deal
Warren Buffet may think Kraft isn't doing a good deal by taking over Cadbury. With Kraft shares falling, Cadbury's shareholders may not think the deal too sweet either and some disgruntled British consumers may be appalled that a much loved brand will be sold to a non-British group -- and one that sells chocolate symbolised by a lilac cow at that.
But one party is sure to get a good deal: the Cadbury pension fund trustees.
While Cadbury fans are digesting the takeover news, the trustees have lost no time in seeking a dialogue with Kraft to make sure they do get a good deal for the workers they represent. Call it fiduciary duty if you like but be sure pension trustees, used to a sponsor that "stood behind the pension fund for more than a hundred years", will give Kraft a hard and cold look to assess its credentials as a sponsor -- what the pension industry calls in vaguely biblical terms "the covenant".
In theory there is no need for a fight -- Kraft was swift to assure it would honour "the existing contractual employment rights, including pension rights". But did the multi-national really know what this pledge would cost, at least in pension terms?
Almost certainly no, because truth to tell the pension trustees themselves do not know. The fund is waiting for the results of its triennial valuation, which should give an accurate picture of the fund's financial shape. Independent consultant John Ralfe told me he thought trustees could present Kraft with a cash injection bill of £200 million or more.
Whether the assessment of an independent consultant not involved with the scheme in question proves right or not, it is fair to assume this kind of money would still be a small price to pay for the successful completion of a £11 billion deal.
If it turns out to be more, Kraft will still be careful not to antagonise the pension trustees because they may not be able to scupper a deal recommended by the board, but a prolonged struggle could attract the attention of The Pensions Regulator.
Hershey’s day in the sun
With the smell of Cadbury Cream Eggs and Kraft cheese slices thick in the air, Nestle could well be getting hungry for some M&A. Will the Kraft-Cadbury deal soften the Hershey Trust enough for a Nestle merger?
Nestle has plenty of firepower with $28 billion from the sale of its remaining stake in eyecare group Alcon and Hershey might be seen as no more than a large bolt-on. In addition, Hershey is one deal Nestle could do without big anti-trust issues.
And as David Jones reports, from a Hershey perspective, some heat may be softening the the Hershey Trust’s aversion to a deal.
The fact that Hershey had been actively trying to fund a bid for Cadbury, even if it ultimately failed, has raised speculation about its future, as has the fact that 85 percent of its sales come from the U.S. market, where Kraft is likely to attack it with Cadbury products.
Hershey, as a pure confectionery player, is also more exposed to commodity costs like cocoa and sugar than wider ranging groups.
With deals flowing again, Kraft is expected to have no trouble drawing demand for a massive bond sale, so we just might see the maker of Kit Kat and Coffee Crisp getting up and cozy with the maker of Hershey’s Kisses.
The afternoon deal: Cadbury/Kraft
After four months of rhetoric, tense talks, phantom bids and late-night humor (Kraft and Cadbury agreed to a deal. Finally, mac and cheese creme eggs!), the deal is done. Here are some different takes on the deal.
The dealmakers:
- Kraft Deal Cements Wasserstein Legacy, Fees for Lazard (Bloomberg)
- Kraft banker to become UK’s top takeover arbiter (Reuters)
- Kraft CEO satisfied with sweetened Cadbury deal (Reuters)
National pride:
- Kraft bid hurts patriotic pride of Cadbury workers and video (Reuters)
- For Britain, Cadbury Takeover Isn’t Easy to Swallow (NYT)
Who won?
Cadbury cracks
The recommended £11.9bn (US$19.4bn) offer by Kraft for Cadbury appears satisfactory to both parties. Kraft gets its prize, ultimately paying 13% more than it initially wanted. Cadbury shareholders receive 48% more than the value of their shares prior to Kraft’s approach.
Cadbury’s board can be pleased they managed to extract so much value when alternative bids seemed unlikely. Kraft’s management, led by Irene Rosenfeld, has remained disciplined helped by the side deal: selling its pizza business to Nestle for US$3.7bn.
Nevertheless, increasing the cash element of its offer to 500p a share, or 60% of the total bid, could cause Kraft some financial headaches, pushing its debt levels to over four times EBITDA. Rosenfeld denies that it will affect the company’s credit rating. If it did, the deal’s rationale would be dented.
That suggests that major shareholder Warren Buffett, who lent Mars US$4.4bn when it bought Wrigley two years ago for US$23bn, could have helped Kraft out on that front. The offer document mentions “alternative financing sources”. Rosenfeld would not comment further.
Another way Kraft could maintain its rating would be if it divested further assets before its £5.5bn bridge financing comes due in one year. Such proposals could have been broached with the ratings agencies. Kraft says the bridge is being amended.
It’s likely Kraft will issue bonds whilst the wind is fair to refinance the shorter term loan. If not, Nestle could be willing to pick up isolated brands, such as Hall’s cough sweets. But Kraft seems unwilling to sell any goodies immediately.
What seems unlikely, given Kraft’s own financial question marks about the enhanced cash-dominated deal, is that Hershey will be able to finance a higher offer before the Takeover Panel deadline of next Monday morning, January 25.
Kraft’s sugar high
Kraft was always expected to raise its bid for Cadbury, even with no real rival to its initial overture and grumblings from top shareholder Warren Buffett about Kraft possibly overpaying with its stock. The only question was how much. But if it did overpay, it did so with credit. Just in case shareholders were thinking of making a stink, CEO Irene Rosenfeld ratcheted up the cash component to a level that negates the need for shareholder approval.
Dealmakers said the agreement was struck after all-night negotiations in London. It values Cadbury at 840 pence per share. Shareholders will also get a special dividend of 10p per share, bringing the total to 850p per share. That far exceeds scaled-back expectations and was a big jump from the sub-800p levels that had so soured earlier negotiations.
With growing expectations that Hershey would muster a bid around these levels, and all of those high-brow British M&A deadlines clicking into place, getting a friendly agreement had gained urgency going into the weekend. While pundits’ palates (beyond those of fondue-chomping Europhiles, if you keep an ear on CNBC) may rebel at the swirling of chocolate and cheese, Rosenfeld has for at least a day gone from looking outflanked by both her own shareholders and grumpy Cadbury executives to a box of chocolate roses.
The proof will be in the pudding. The question of digestion has yet to be answered. The new deal increased Kraft’s annual cost savings target to at least $675 million by year three, up from $625 million. Though it made no mention of possible job losses among Cadbury’s 46,000-strong global workforce, the deal has gone from “derisory,” as Cadbury initially called it, to delicious quickly enough to wonder why Kraft took so long to close it.
DealZone Daily
Tuesday’s highlights:
* U.S.-based Kraft Foods Inc and Britain’s Cadbury Plc are close to sealing a friendly deal to create the world’s largest confectionery group for up to 11.7 billion pounds ($19 billion), sources familiar with the matter say.
* Japan Airlines Corp’s board of directors decided on Tuesday to file for bankruptcy protection, Kyodo news agency says.
* Industrial conglomerate Tyco International will acquire Broadview Security for $1.9 billion in a deal that brings together two large providers of residential and commercial security in North America, the two companies say.
* Chinese wind power producer Xinjiang Goldwind Science & Technology Co has chosen China International Capital Corp (CICC) as lead underwriter for a Hong Kong initial public share offering aimed at raising $1.5 billion in the first half of 2010, sources close to the plan say.
For more on these and the rest of the latest deal-related news from Reuters, click here.
And elsewhere (some external links may require subscriptions):
DealZone Daily
Monday’s highlights:
London-based oil explorer Tullow Oil (TLW.L) exercises a right to buy Ugandan oil fields which its partner in the fields, Heritage Oil (HOIL.L), previously agreed to sell to Italy’s Eni (ENI.MI) for $1.5 billion.
Some of Cadbury’s (CBRY.L) biggest shareholders, led by Legal & General, continued to reject Kraft Foods’ 10.5 billion pound ($17.2 billion) bid and will look for an increased offer.
Brazil’s Camargo Correa Group reiterates its interest in cement maker Cimpor and says it is pondering its options after the Portuguese stock market regulator turned down its merger proposal.
Dutch sports car maker Spyker denies it has plans to bid jointly for General Motors’ Saab with Luxembourg investment firm Genii Capital.
For more on these and the rest of the latest deal-related news from Reuters, click here.
And elsewhere (some external links may require subscriptions):
Is Cadbury too rich for Hershey?
While Cadbury shares saw some life on hopes for a rival bid from Hershey — boosted by reporting from the FT that a rival offer was further along than much of the market had assumed — naysaying analysts and pundits have been quick to point out that the financials of a Hershey bid are hard to stomach.
Hershey is only half the size of Cadbury, and a big share issue would dilute the stake of the controlling Hershey Trust, which has been every bit as crucial to defining the company as the kiss. The FT report says Hershey is working on a private equity element with none other than Byron Trott, Warren Buffett’s banker of choice. The idea that Buffett, who is Kraft’s biggest shareholder, could play both sides of a bidding war is, if not new, certainly intriguing, particularly given his apparent distaste for Kraft selling its own shares to keep its bid attractive.
And while Cadbury has repeatedly denied it is looking for a white knight, a deal that would leave its management in place, perhaps in exchange for keeping the Hershey Trust intact, could be attractive enough to consider breaking off a piece of Cadbury to give to a private equity investor to chew on … its gum business, for example.
