Kraft Foods Inc. (KFT) on Monday made a formal unsolicited offer to acquire British chocolate giant Cadbury Plc (CBY,CBRY.L, CDSCF.PK). Cadbury rejected the 'derisory offer' and encouraged shareholders to turn down the bid, noting it is worse than a previous offer due to the fall in the Kraft share price since September.
The offer, which met the deadline set by U.K. regulators, is the same as the one the world's second largest food company announced two months back.
Kraft's most recent cash and shares offer values Cadbury at GBP9.8 billion ($16.3 billion), below the GBP10.2 billion offered in September, before Kraft shares slid and the dollar slumped badly versus the sterling.
Kraft said in a statement it was offering Cadbury shareholders 300 pence in cash and 0.2589 new Kraft shares for each Cadbury share
Cadbury's Board rejected the initial offer immediately, stating that the proposal fundamentally undervalued the company and its prospects. The offer was for 300 pence in cash and 0.2589 new Kraft Foods shares per Cadbury share, valuing each Cadbury share at 745 pence representing a 31% premium to Cadbury's September 4 closing share price of 568 pence.
The U.K. Takeover Panel said on September 30 that Kraft must announce a firm intention to make an offer for Cadbury or abandon its bid by November 9. If Kraft announces that it does not intend to make an offer for Cadbury, it will be restricted from making an offer for six months from the date of such an announcement, the regulator said then and both companies accepted this ruling.
Commenting on the offer, Irene Rosenfeld, Chairman and CEO of Kraft Foods, said today: "We remain convinced of the strategic merits for both companies of combining Kraft Foods and Cadbury. We believe that our proposal offers the best immediate and long-term value for Cadbury's shareholders and for the company itself compared with any other option currently available, including Cadbury remaining independent."
Cadbury said today that the offer values each Cadbury share at 717 pence, based on the closing price of $26.78 for a Kraft share on November 6 and an exchange rate of 1.6609 USD / GBP. ''The Offer's cash price per share and exchange ratio are unchanged from Kraft's announcement of 7 September. However, due to the fall in the Kraft share price since then, the implied value for each Cadbury share is around 4% lower. Therefore, the Offer is worse than the proposal that the Board has previously rejected as fundamentally undervaluing Cadbury and its prospects,'' the maker of Dairymilk chocolates said.
As a result, the Cadbury Board recommended that its shareholders reject the offer. The company said it will be communicating with shareholders in due course to explain why it believes the offer falls well short of reflecting the value of Cadbury.
Roger Carr, Chairman of Cadbury, said: "The repetition of a proposal which is now of less value and lower than the current Cadbury share price does not make it any more attractive. As a result, the Board has emphatically rejected this derisory offer and has strengthened its resolve to ensure the true value of Cadbury is fully understood by all.''
"Cadbury is an exceptional standalone business. It has strong iconic brands, a sharp category focus and an enviable geographic scope. Our successful financial delivery and strong business model reinforce the Board's belief in both the strategy and prospects of Cadbury as an independent company,'' Carr added.
Cadbury noted that Kraft's offer does not come remotely close to reflecting the true value of the company, and involves the unattractive prospect of the absorption of Cadbury into a low growth conglomerate business model.
On November 3, Kraft said its third quarter profit declined 39.5% from last year, when results were boosted by huge gains from divestiture of discontinued operations. Net income dropped to $824 million or $0.55 per share from $1.4 billion or $0.91 per share for the year-ago quarter. Net revenue for the third quarter fell 5.7% to $9.80 million from $10.40 million in the same quarter last year.
While announcing the third-quarter results, Rosenfeld said about the offer to buy Cadbury, "We remain interested but will maintain a disciplined approach. Our criteria include accretion to cash EPS in the second year, delivering a return on investment well in excess of our cost of capital, and maintaining both our investment grade credit rating and our dividend."
The acquisition will help Kraft expand its presence in several growing markets.
Credit Suisse said in September that Kraft's attempt to buy Cadbury makes a great deal of strategic sense. However, the firm sees a high degree of risk that Kraft will need to keep raising its bid and stretching its balance sheet to get the deal done. The firm believes that as much as a 51% premium might be necessary to buy the business, compared to the 31% premium in the initial proposal that Cadbury rejected.
KFT closed Friday's regular trade at $26.78, up from the previous close of $27.03, on 11.86 million shares.
CBRY.L is currently trading at 760.00 pence, up 2.00 pence or 0.26%, on 14.62 million shares, compared to a 3-month average volume of 8.29 million shares.
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