A Chocolate Story-Kraft’s Fight for Cadbury
When Irene Rosenfield the CEO of Kraft Foods(KFT),the worlds second largest food company and the largest Food company in North america unveiled a surprising bid for cadbury(CBY) over the Labor day weekend,i was hoping that the Cadbury Management would happily take the offer in the backdrop of a market in consolidation mode and the overall dipping operating margins.
The Initial offer was that for each CBY share,KFT proposed to give 300Pence in cash and 0.2589 KFT share.The total share capital of CBY being around $16.8 Billion.The KFT offer was at a premium of 26%.The CBY management had turned down the offer,stating that the offer did not show the true value of the company and that it did not want to merge with the “slow growing” Conglomerate business model of Kraft.
The analysts feel that Kraft is Overpaying for Cadbury.Warren Buffet,who incidentally is a major stakeholder in KFT has warned Irene against overpaying .
Based on the proposed price of 745 pence per ordinary share or approximately $50 per ADR, CBY needs to deliver top line growth of 10% and EBITDA margins of 27% each year from 2010 to 2014 to justify the purchase price. Historically, CBY’s organic top line growth has been in the range of 4-6% and its EBITDA margins have declined from 22% in 2004 (peak) to 15% in 2008 (trough). It doesn’t take a brain surgeon to conclude, it will be very hard for CBY to achieve those lofty operational assumptions in the future to deserve the purchase price. If we boldly assume all the projected $625 million annual savings will come from Cadbury and be realized, CBY’s standalone EBITDA margin will increase by approximately 8%, still falling short of the implied 27% margin, based on its profitability track record from 2006 to 2008 (17%, 16%, and 15% respectively each year). In other words, even if the annual cost savings assumptions are realized, it is likely that Kraft is still overpaying for the projected cash flows CBY can bring to the table.But this is from an analyst point of view.These numbers are purely from a valuation perspective and does not take in to consideration the potential revenue growth due to their strategic fit in the new markets.The Finance guys like to believe that 2+3 is 5.I defer with them here as 2+3 could be 7 if you have operational and marketing synergies.
For Kraft it makes Business sense for this acquisition as it is a strategic move to enter in to new Developing markets like India and other countries where kraft still does not have any presence. In the wake of a flat top line kraft needs to enter new markets to have a Global Foorprint.Markets like India,which has long been untouched by kraft needs to be revisited considering the growing economy and value conscious consumers.Unique segments is already available for Kraft to target especially the Convenient meals section with most of the Young families under the double income group.Some of the Local players are already present in this segment.With cadbury already having a huge presence here and with a mature distribution channel kraft would have the ideal partner for the next wave of growth.
Kraft Management should pursue this hard and should never feel that they are overpaying.Ofcourse the greatest challenge which kraft will have to manage is integrating the new unit with its business.But then historically they have a good record of integrating brands to their portfolio.
I know Companies especially system integrators,including mine, will be closely watching this,as there is huge business for them once this merger happens.Lets wait and watch.I have a gut feeling that this will happen.
Meanwhile INDIA get ready to taste the OREO’s and RITZ.
Mrkurup's Point of View 
