THOSE Cadbury shareholders hoping Hershey will take Kraft on in a bidding war are likely to be disappointed. The maker of Reese’s Peanut Butter Cups is going to find it awfully hard to fund a takeover, as its enterprise value is estimated at around $10bn (£6.1bn) compared to Cadbury’s $21.3bn.
Simply raising the funds in a rights issue is not an option, as it would dilute the Hershey Trust that owns 30 per cent of the shares and 80 per cent of the voting rights. The Trust’s chairman has made it clear that he wants it to maintain overall control.
Similarly, talk of Hershey raising some $10bn of funding from the private equity industry seems implausible. Whether there is any demand among private equity houses for shares in a massive, publicly-quoted Hersbury is doubtful.
And if Hershey managed to raise enough debt to swallow Cadbury, the new company would have a perilously overstretched balance sheet. That would almost certainly mean divesting assets after the transaction is complete.
Jeremy Batstone-Carr of Charles Stanley identifies Hershey’s US Kit Kat brand as an asset that would be sold, probably for around $1.6bn to Nestlé, which owns the brand virtually everywhere else. Nestlé is also the most likely buyer for Cadbury’s gum business, which would fetch around $12.9bn.
Still, selling off Cadbury’s gum assets would be foolish. It is one of the fastest-growing areas of the business, and one of the main reasons Kraft is pressing ahead with its takeover. Much of the growth in emerging markets like India and South America will come from gum, as the hot summers make chocolate less popular in these countries?.
Hershey is unlikely to enter the fray, meaning Kraft will remain the only kid in town. Even if the latter raises its bid to around 840p, that still undervalues Cadbury which is worth about 900p. Lord Mandelson, who has been telling investors to look for long-term value and not a quick buck, is in this instance right. Cadbury shareholders should sit tight.