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Analysts say more cash could sway Cadbury

A Kraft-Cadbury combination would become a global food giant with more than $50 billion in combined revenue. The key to a successful deal could be cash, some analysts say. A Kraft-Cadbury combination would become a global food giant with more than $50 billion in combined revenue. The key to a successful deal could be cash, some analysts say. (Kirsty Wigglesworth/ Associated Press/ File 2009)
By Sarah Skidmore and Marc Levy
Associated Press / September 9, 2009

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PORTLAND, Ore. - British candy maker Cadbury PLC is awaiting a sweeter offer than Kraft Foods Inc.’s $16.7 billion stock-and-cash proposal. But it is unclear whether Kraft or other potential suitors - such as Hershey Co. and Nestle SA - will put more cash on the line, which could prove key to a deal.

Cadbury, the second-largest global candy maker with brands including Trident, Dentyne, and Cadbury Creme Eggs, quickly rejected the surprise offer by Kraft Foods on Monday, saying it fundamentally undervalues the company. But Kraft’s CEO, Irene Rosenfeld, is continuing to make a case for the deal, which would expand Kraft’s global footprint.

Cadbury’s rejection, however, opens the door to discussions with others. Analysts suggest Switzerland-based Nestle, the world’s largest food maker, and US-based candy maker Hershey might come together to consider making a bid of their own.

Kraft, the world’s second-largest foodmaker with brands Ritz, Oreos, and Toblerone chocolate, said yesterday that it plans to continue discussions with Cadbury and will try to keep the efforts friendly. Rosenfeld said she believes Cadbury will realize the value of the offer in the coming weeks.

“We fully expect either a dialogue between these two companies to commence resulting in an increased offer, or hostile offer from Kraft,’’ Stifel, Nicolaus & Company Inc. analyst Christopher Growe wrote in a note to investors yesterday.

Some analysts say cash could prove more important as Cadbury’s investors have limits on how much US stock they can hold. But Kraft dismissed the concerns, saying Cadbury has an array of international and US investors as well who would see the benefit of holding Kraft stock.

Kraft declined to discuss whether it would be willing to increase the cash portion of its offer or turn the offer hostile.

The Northfield, Ill.-based company said it does not believe it will have difficulty financing the current proposal but said it remains committed to not weakening its credit rating in the deal, which could be affected by increasing the cash portion of its offer.

Kraft shares fell $1.65, nearly 6 percent, to close at $26.45, in the first day of US trading since the offer became public. Cadbury shares rose 3 pence to 786 pence on the London Stock Exchange after rising sharply Monday.

The candy sector is strong, as its products have higher profit margins than some other packaged foods.

It is also considered an affordable luxury, particularly important in a recession.

Cadbury would have access to Kraft’s strong position in North America and benefits of size. Kraft estimates annual cost savings of $625 million stemming from a potential acquisition on top of both companies’ recent spending initiatives.

A deal would also help Kraft expand its global presence with access to Cadbury’s more diverse business, including its strong foothold in developing countries like India and Mexico.

Kraft proposed paying a more than 30 percent premium over Cadbury’s closing price on Friday but the proposal depends heavily on the stock portion of the offer.

As for competing bids, Hershey would not be likely to make a bid on its own because of its smaller size and complications with its ownership.

Hershey’s late founder, Milton S. Hershey, established a charitable trust that remains the company’s majority owner and has said the trust will not give up its controlling stake.

Analysts say that limits the company’s flexibility to grow through a merger because issuing stock to pay for an acquisition would dilute that stake.