Who's sitting pretty now that Kraft is set to gobble up Cadbury?
After several months of sniping at each other in the media, Kraft Foods' takeover bid for Cadbury (LSE: CBRY) looks to have succeeded with Tuesday's announcement that Cadbury directors were recommending that their shareholders accept Kraft's revised offer of 500p plus 0.1874 Kraft shares and a 10p dividend for every Cadbury share.
Opposed takeover bids can be quite entertaining for those sitting on the sidelines and there have been a few lively statements during this bid. Cadbury shareholders might wonder why an increase of 10% in the original offer has caused their directors to change their mind so that they should accept shares in what they had previously called "an unattractive low-growth conglomerate."
Still, it's not come close to one of the best bid defences ever mounted. This was back in 1991 when ICI torpedoed Hanson's hostile takeover bid by exposing that Hanson had spent several million pounds of company money on racehorses which it co-owned.
The Bid From The Kraft Side
Unlike the vast majority of Brits with an interest in the bid, I am a Kraft shareholder.
Generally I'm not in favour of hostile takeover bids because all too often the directors of the bidding company treat a bid as a way of showing their corporate machismo. They end up being more concerned in getting the win than the risk of overpaying and destroying shareholder value for the acquiring company.
It's not their own money that they are spending, by increasing the size of the company then they get paid extra, and if the takeover turns out to be a disaster then they'll probably get a juicy payoff.
Initially I was indifferent to the success or failure of the bid, but I now take the view that Kraft has overpaid. Warren Buffett, whose company Berkshire Hathaway owns 9.4% of Kraft, recently said that Kraft's shares were a "very expensive currency" and the day after the offer was accepted has come out and said that it is a "bad deal".
Buffett is not only indicating that he thinks that Kraft shares are cheap but also that Kraft had already offered a very full price for Cadbury with the original bid.
Objections
As an aside, one of the less welcome things exposed by Kraft's bid is the nationalism which lurks in British society. All too often the person who complains about the sale of a British manufacturing company will completely fail to see irony in that they may drive a BMW car, wear an Italian suit, own shoes which were made in the Far East, use a Nokia phone and drink French wine whilst using a Phillips DVD player to play a Warner Brothers film which they watch on a Sony TV.
Furthermore some British politicians have made promises about imposing conditions upon Kraft. Have they forgotten that they cannot deliver anything when it comes to bids and competition? This is because British authority in these areas is delegated to the European Union's competition commission which approved the bid a couple of weeks ago.
Another objection that has been raised is that Kraft will shut down production in the UK and move it overseas. This ignores the fact that Cadbury has exported jobs in the past and until last Tuesday the Fry's factory in Keynsham was due to be closed when Cadbury moved production to Poland. In contrast Kraft has said that the Keynsham factory will be kept open.
Cadbury hasn't really been a largely British company for many years. For one thing, barely 10% of Cadbury employees work in Britain and the vast majority of its production and sales are made in other countries. Cadbury should be thought of as a multinational company which is notionally "British" due to its history and because its headquarters are in England.
Bigger Dividends
Kraft's five-year earnings and dividend per share record is summarised in the table below:
| Year | 2008 | 2007 | 2006 | 2005 | 2004 |
|---|
| Earnings per share | $1.92 | $1.62 | $1.85 | $1.55 | $1.55 |
| Dividend | $1.12 | $1.04 | $0.96 | $0.87 | $0.77 |
For the first three-quarters of 2009, earnings per share were $1.55 and the forecasts for 2009 were recently upgraded to about $2 per share. Thus based upon Kraft's current share price of around $28.60 this puts the shares on a prospective P/E ratio of 14.3, which is less than half Cadbury's P/E ratio.
Kraft currently pays a quarterly dividend of 29 cents per share so, after deducting 15% for American withholding tax, the net yield on Kraft shares for UK shareholders is 3.4%. This is a bigger dividend than Cadbury paid before the bid was announced!
Other Bid Speculation
If a Cadbury shareholder doesn't want to hold Kraft shares because of the extra hassle incurred in dealing with American shares, or because they think that Kraft's growth prospects are poor (perhaps because they overpaid), they might wish to sell before the bid completes.
There's still the admittedly unlikely chance that at this late stage Hershey might make a counter-offer for Cadbury. If this happens, anyone who's been objecting to Kraft's bid because of the debt should note that Hershey is a much smaller company than Kraft and thus less able to service such debt.
More from Tony Luckett:
> Tony owns shares in Berkshire Hathaway and Kraft.
