CADBURY DESERVES MORE: Kraft had offered Cadbury almost 16 times its prior year earnings. Mars had offered Wrigley almost 18 times on a similar deal last year. Looking at the value which Cadbury will add to Kraft’s dying market and given that Cadbury ranks among top two globally in most of its businesses, Kraft should offer Cadbury at least 19-20 times of Cadbury’s last year’s earnings. Going by this rule, Kraft should offer Cadbury a deal of at least £12.5bn. This means that Kraft will be evaluating each Cadbury share at a price of 913p, which is 22.6% higher than the previous evaluation of 745p. This new price is 16% higher even than the current share price of 786p.
But Kraft shares have fallen by almost $1.5 per share. This means that Kraft will have to arrange more in cash or give away more Kraft share per Cadbury share, making the deal tougher to crack in both the situations.
SUPER UPDATE: MicroReviews predicted that the Kraft-Cadbury deal is very important for Kraft and it will deifinitely bid for Cadbury at a higher price. We predicted that Kraft may hike the deal value by £3.0bn. Reuters has reported that Kraft is looking to sweeten the deal – Kraft Primed to sweeten $16.7bn Cadbury bid. (For details see full story).
Earlier Today: 
Foods Inc. Kraft foods (NYSE: KFT), Illinois, USA reportedly approached Cadbury (LSE: CBRY), UK’s largest confectionery company, with a deal worth £10.2bn (US $16.75bn) in cash and Kraft shares, but the deal was rejected by Cadbury on grounds of lower valuation by Kraft.
Kraft had offered 300p in cash and 0.2589 new Kraft shares for each Cadbury share, totalling to 745p per share, which was 31% higher than the 568p closing value of Cadbury shares on Friday, Sep 04, 2009.
This deal isn’t bad if you look at Cadbury’s performance in the past 3 months at London Stock Exchange (LSE). Cadbury shares have stayed around £580~£590 for almost 5 weeks now, and were languishing at around £530 before that. Even with such an average performance, analysts at Cadbury were hoping a better valuation by Kraft, and the reason for this was Cadbury’s increase in profit even in times of recession.
But if we look at the historical data, Cadbury shares have always stayed around this price for almost four years now, except two instances when the share prices had jumped due to rumours of a Kraft-Cadbury deal. Let us have a look at those two instances and today’s revelation by Kraft.
- July 2007
- Cadbury shares jump to nearly 725p when Kraft shows interest in Cadbury.
- Kraft does not approach Cadbury as it is already in a financial strain due to a recent acquisition of Danone’s biscuit unit.
- Cadbury shares fall down to as low as 535p per share within a quarter.
- May 2008
- Mars acquires Wrigley to jump into the gums segment. Kraft also states that it plans to add the gums segment to its business.
- Kraft-Cadbury deal rumour catches up for the second time. Cadbury shares soar to 700p per share.
- Share prices fall down to 600p within a quarter after everyone realizes that no acquisition will take place.
- September 2009
- Kraft finally approaches Cadbury with a £10.2bn deal, but is turned down by Cadbury.
- People start buying Cadbury shares in a frenzy hoping that the deal might get successful in the coming days. Cadbury shares sky-rocket to as high as 806p during intra-day trading.
- Cracking the deal becomes tougher for Kraft due to the swolen Cadbury share prices.
Because of this swell in the share prices, Kraft may have to wait for sometime before the share prices come down to the base value. The waiting time could vary from a month to a quarter. If Kraft wants to crack the deal at the present prices of the shares, then it will have to shell out about £3.0 bn over and above the current offering. Probably Kraft will wait for some time, but may pay up more as this deal is very important for Kraft. Primary reasons are:
- Cadbury has a good foothold in the gums segment. To bring a new product and compete against Cadbury would be a bad strategy for Kraft.
- Cadbury also has a established market in booming economies like India and Brazil. Kraft needs these markets to expand itself out of the recession hit US market.
If the deal goes through, we may see more of US junk food buzzing our markets.
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