Eating comfort food at home and, if all else fails, gorging on chocolate seem to be the simplest ways for consumers to lighten the mood in the dark days of recession. Revenues grew in 2008 at both Kraft Foods, an American giant, and the latest morsel that it wants to gobble up, Cadbury, a British confectioner. The slump-defying strength of Kraft convinced it to make a $16.7 billion cash-and-shares bid for Cadbury, which it made public on Monday September 7th in the hope that Cadbury’s shareholders might see sense in the proposal. The board of the British maker of chocolate and gum quickly rebuffed the bid as “fundamentally undervaluing” the company.
Kraft has its sights on the world’s second-largest confectionery-maker to form a “global powerhouse in snacks, confectionery and quick meals” with combined revenues of some $50 billion. Analysts agree that the firms would make an excellent fit. Kraft has little presence in Britain’s confectionery market, where Cadbury is strong, but it has thriving businesses in Scandinavia and Brazil, where Cadbury has made few inroads. Particularly attractive to Kraft is Cadbury’s strong showing in chewing gum, an area where Kraft has little expertise, particularly in Europe and Latin America.
Getting its hands on Cadbury would also allow Kraft to compete more closely with Mars. The American confectionery giant has plenty of clout with retailers since it controls 14% of the global confectionery market after its purchase in 2008 of Wrigley, a gum-maker, for $23 billion. A combination of Kraft and Cadbury would result in a firm with a similar portion of the world market. In the wake of the Mars/Wrigley deal many industry-watchers expected that Cadbury might make acquisitions of its own to take on the new market leader.
Cadbury was even touted as a possible buyer of Kraft’s confectionery arm. The British firm had bulked up by buying Adams, a big gum-maker, in 2003 to recover the number-one spot among confectioners that it held until the Mars/Wrigley tie-up. But attempts to streamline its business by selling the Dr Pepper Snapple Group, its American soft-drinks arm, coincided with the credit crunch. Cadbury was unable to make a lucrative sale to a private-equity firm, instead spinning off the business and raising rather less than it had once hoped for to fill its coffers for acquisitions. Cadbury is rumored to have eyed Hershey, America’s dominant chocolate-maker. But any potential deal would probably have failed to win the support of the trust which controls Hershey and which is fiercely independent.
Cadbury’s success in realigning its business makes it a tasty target. Kraft estimates that it can wring out annual savings of $625m by the third year and has cannily promised to keep open a factory in Britain that was destined for the chop. But that is probably not enough. Cadbury’s shares leaped by over 40% on Monday morning after investors digested the news of the potential takeover, somewhat in excess of the 31% premium offered by Kraft over Friday’s closing price.
It seems likely that Kraft will return with a better offer. Cadbury’s mainly British investors are likely to want to see more cash in the takeover offer rather than shares in Kraft. But opinion is divided over how much more it can afford given its debt pile of $20 billion, a hangover from its purchase in 2007 of the biscuit business of Danone, a French food firm. Another possibility is that Hershey may team up with Nestlé for a joint bid that would split Cadbury between the two with the American firm swallowing the chocolate business and the Swiss one walking away with the gum side. What seems certain is that, amid the consolidation among confectionery businesses, Cadbury’s days as an independent company are drawing to a close.