The battle for control of Cadbury is hotting up.
In an attempt to thwart the ongoing takeover bid from Kraft, Cadbury (LSE: CBRY) has released a combined Q4 trading update and defence document, and is also in talks with Hershey about the tabling of a possible counter-bid.
Kraft had claimed that its initial offer, comprising 300p in cash and 0.2589 Kraft shares per Cadbury share, valued Cadbury shares at 713p each, based on the Kraft share price on 1 December. That offer was rejected by Cadbury's management as "derisory", even though it is considerably higher than the 500-600p price range that Cadbury shares had been hovering between in the months leading up to the bid interest.
The Unite union is also urging shareholders to reject Kraft's bid, claiming that the takeover would threaten jobs -- shareholders have until 5 January to decide whether to accept Kraft's offer.
Price boost
However, the price of Cadbury shares on the open market quickly jumped to around 800p, as investors apparently hoped that a better offer might be on the cards from a competitor.
If Cadbury's management are right that Kraft's offer seriously undervalues the company, they are, in effect, admitting that they are failing to turn the company's business performance into an appropriate return for shareholders. So, what does Monday's document tell us about Cadbury's plans to boost shareholder value?
Firstly, we were told that performance up until the end of November has been in line with expectations announced at the time of the company's third-quarter update in October, and that growth is continuing in all three of its divisions -- chocolate, gum and candy.
Growth in emerging markets is still strong, with India, the Middle East and Africa leading the way, while growth still continues in the UK and the US. Overall revenues are forecast to grow between 4% and 6% by the end of the year.
Growth, growth, growth
Revenue growth (variously described in the document as strong, continuing, excellent, robust) appears to be the key point of Cadbury's defence against Kraft, with chairman Roger Carr making a passionate plea to shareholders...
"Kraft is trying to buy Cadbury on the cheap to provide much needed growth to their unattractive low-growth conglomerate business model. Don't let Kraft steal your company with its derisory offer."
To try to put some numbers on the growth expectations, Cadbury tells us that it has set targets to grow revenues organically at 5-7% per year, to improve margins to 16-18% by 2013, and to achieve 80-90% operating cash conversion from 2010.
A double-digit increase in dividends is also targeted from 2010 onwards, which is probably a good move. Cadbury's low dividend yield of 2.4%, as forecast for the next year, has to be a significant factor in holding back the share price -- it was, admittedly, nearer 3% before the bid-boosted share price jump, but that's no great shakes in these days when many good solid companies are offering twice that.
So, will promises of continuing growth in the future, with the implication that it will slowly bring the share price up, do the trick? Long-term investing is great in the, erm, long term, but few investors will turn their noses up at jam today rather than patiently waiting until tomorrow.
A new bidder?
With Cadbury having apparently held talks with Hershey concerning the possibility of a friendly bid to counter Kraft's, one really has to suspect that Cadbury's management don't have much faith that fine words will win the day against hard cash.
Hershey, which has a licence to distribute Cadbury-branded products in the US, is seen by many as a more compatible suitor, with the two companies addressing pretty much the same market, and claiming to have similar values.
Cadbury has not commented yet on the Hershey story, because there is as yet no bid, and it could still be a long time before anything emerges. But at the same time, some are expecting Nestlé to join in the bidding too, as it has not ruled itself out yet. And, of course, Kraft's current bid is not necessarily its final one.
Whoever the eventual winner is, a takeover does seem to be the most likely outcome, and Cadbury is very unlikely to win shareholders' hearts over with promises of long-term trickling growth -- what they're surely much more interested in now is who will make the best offer, though it may well turn out to be not much more than the current share price.
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