Cadbury surrenders - but Milks Kraft for £12bn

Cadbury has succeeded in squeezing a much bigger bid out of Kraft. But will it live to regret it?

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Last Updated: 06 Nov 2012

Cadbury's days of independence look numbered: the UK confectioner has given its backing to a new and improved £12bn bid from US food giant Kraft. After months of banging on about discipline, Kraft has suddenly cranked up its bid substantially - so the Cadbury board has finally got the kind of price it has been holding out for all along. That's great if you're a hedge fund with a wedge of shares, but what about Cadbury itself? The strategic logic of this deal has never been obvious - and it's hard to make these big takeovers pay off at the best of times, let alone when there's so much bad blood between the two. Equally, the amount of money Kraft is borrowing will put it under greater pressure to slash costs - which could affect British jobs. All in all, this doesn't really feel like an outcome worth celebrating.

Kraft is now offering to pay 840p a share for Cadbury, plus a special dividend of 10p. That’s a 50% premium on Cadbury’s previous share price, and a multiple of 13 times last year’s EBITDA (decent, though not as much as Mars paid for Wrigley back in the good old days). It’s also boosted the cash component of the bid to 500p, presumably to placate Warren Buffett, who’d been moaning about the amount of stock the company was giving away. To fund all this, it’s borrowing a whopping £7bn from a consortium of three banks. All of which might seem a bit odd, given that a) Kraft’s original offer was nearer the £10bn mark, b) it has continually insisted that it wouldn’t over-pay, and c) there are still no other bidders in the offing. But maybe Kraft boss Irene Rosenfeld has just been managing expectations downwards all along.

Cadbury chairman Roger Carr has been aggressively holding out for a price nearer 850p since the very beginning, so on paper it looks as though he’s got his shareholders a pretty good deal. But when he and CEO Todd Stitzer depart – as they presumably will if the deal goes through – what kind of long-term prospects does Cadbury have? Kraft has been cagey about job losses, but with £7bn of fresh debt on its balance sheet it will be looking to cut even more costs than originally planned – which may not be good news for Cadbury’s 5,600 UK staff (let alone the 40,000 elsewhere).

And even if Kraft doesn’t degrade the quality of Cadbury’s chocolate, or start putting processed cheese in the middle of Wispas, it’s hard to see this deal going down well in the UK. Cadbury has a long and proud history as an independent UK manufacturer – once this deal goes through, it’ll just be a small offshoot of a US conglomerate, with all significant decisions shifted to Illinois. It’ll be seen as another UK industrial success flogged to the highest bidder (which won’t do the Government any good either, given Mandelson’s recent protestations).

It’s not quite over yet. Shareholders could still reject the deal (Standard Life said yesterday that it wanted 900p+, while Stitzer has argued that Cadbury could be worth 1000p by 2013). Or Hershey could yet emerge to spoil the party. But at the moment, Cadbury’s stand-alone prospects look slimmer than a slice of Kraft's processed ham.


In today's bulletin:

Cadbury surrenders - but Milks Kraft for £12bn
Record jump in inflation as VAT and fuel prices rise
Editor's blog: Cadbury goes the same way as our cars
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