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Kraft Foods, Cadbury agree $19.4 billion deal

January 19, 2010|By Mike Hughlett

CHICAGO -- After four months of dismissing Kraft Foods buyout overture as a low-ball affair, Cadbury PLC on Tuesday agreed to a greatly sweetened $19.4 billion offer, creating the world's biggest chocolate company.

Great Britain-based Cadbury had steadfastly rejected Kraft's early offer of around $17 billion, but the Northfield, Ill.,-based company -- facing a Tuesday deadline to up its bid or hold steady -- did the former, turning a hostile pursuit into a friendly deal.

Kraft, maker of everything from Velveeta processed cheese to Oreo cookies, still has to persuade a majority of Cadbury shareholders to accept the deal, and the door remains open until 7 a.m. Monday for The Hershey Co. to jump in with a rival bid.

But Hershey, a considerably smaller company than Kraft, might have a tough time getting the financing to top Kraft's bid.

Kraft, with $42 billion in annual revenue, is a collection of brands and foods, from Oscar Mayer meats to Oreos to chocolate candy in Europe. Cadbury, with about $8 billion in revenue, is a worldwide leader in chocolate and is known best in this country for its Dentyne and Trident brand chewing gum.

"The two companies are highly complementary," Irene Rosenfeld, Kraft chief executive,, told investors in a conference call Tuesday.

The combined companies would be the world leader in chocolate and sweets, Kraft said, and No. 2 globally in the high-growth gum market. For Kraft, the deal should help boost its overall sales and profit growth rate and greatly bolster its presence in international markets.

Indeed, Rosenfeld told investors in Tuesday's conference call that the biggest opportunity presented by the deal is to "fill in geographic white spaces." For instance, with Cadbury's strong presence in India and Mexico, Kraft will have better opportunities to distribute its products there.

The board of Cadbury PLC recommended that its shareholders take Kraft's offer of 840 pence ($13.78) per share, amounting to 11.9 billion pounds, or $19.5 billion. Cadbury shareholders would also get a 10 pence dividend previously promised by Cadbury.

The revised bid is for 500 pence cash and 0.1874 new Kraft shares for each Cadbury share, still somewhat less than some analysts believed the company is worth but 50 percent higher than Cadbury's market value before Kraft went public with its approach in September. Cadbury Chairman Roger Carr, who had led the spirited defense against Kraft's previous offer, said he believed the deal "represents good value for Cadbury shareholders."

Cadbury shares were up 3.3 percent at 834 pence after the announcement.

"Although we always considered that 850 pence could be enough to win shareholder support we have to admit surprise at how meekly Cadbury has apparently acquiesced," said Jeremy Batstone-Carr, analyst at Charles Stanley & Co.

Only last week, Batstone-Carr added, the Cadbury chairman "had confidently predicted that the company's share price could be over 10 pounds (1,000 pence) in due course."

David Cumming, head of U.K. equities at Cadbury shareholder Standard Life, had said Monday that Kraft needed to aim above 900 pence to secure support from long-term shareholders. But on Tuesday, he signaled the fight was over. "I probably won't go against the view of Cadbury's management," he told the BBC.

Some in Britain are disgruntled at the prospect of a historic brand losing its independence.

Cadbury's roots go back to the grocery store opened in 1824 by John Cadbury in Birmingham. A Quaker, Cadbury believed cocoa and drinking chocolate were healthy alternatives to alcohol, considered to add to the miseries of the working class.

Its Dairy Milk chocolate brand was launched in 1905 as a challenge to dominant Swiss chocolate makers.

"We have great respect for Cadbury's brands, heritage and people. We believe they will thrive as part of Kraft Foods," said Kraft's Rosenfeld.

Kraft predicted pretax cost savings of at least $675 million a year once the combination has been working for three years.

The agreed price is 13 times Cadbury's earnings before interest, taxes, depreciation and amortization; Cadbury had argued that similar recent takeovers in the sector had been for 14 times EBITDA or more.

Billionaire investor Warren Buffet, whose Berkshire Hathaway is Kraft's biggest shareholder, had warned against offer any more shares for Cadbury. Buffett declared last year that he believed Kraft's original offer for Cadbury was "pretty full."

Kraft said the latest offer reduces the share portion, and thus won't need to be approved by its shareholders.

Hughlett writes for the Chicago Tribune

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