Why the Cadbury Deal MattersMark Scott
Like kids fighting for left-over Halloween candy, the world's largest food companies are battling to take over British chocolate-maker Cadbury (CBRY.L). Kraft (KFT), Hershey, Italy's Ferrero, and even European giant Nestlé (NESN.BE), have been linked to the world's No. 2 confectionery company. That's not surprising: Everyone wants to lay claim to the fast-consolidating global market for sweets. The stakes couldn't be higher. According to market researcher Euromonitor, the worldwide confectionery business is highly fragmented between well-known names. Mars, based in McLean, Va., which bought gum maker Wrigley last year for $23 billion, tops the global rankings, followed by Britain's Cadbury. Food giants Nestlé and Kraft finish third and fourth, respectively. And privately held Hershey and Ferrero round out the top six. By pocketing Cadbury's candy and gum businesses, particularly in emerging economies, any potential acquirer would quickly become the world's biggest candymaker. It would gain access, of course, to Cadbury's dominant position in Britain—the company's large and profitable but slow-growing home market. But the deal also would instantly cement the newly merged firm's foothold in developing countries such as India, where consumers' insatiable appetite for candy is fueling double-digit market growth. Frantic Race"Companies are going after Cadbury as part of a defensive move," says Euromonitor analyst Ildiko Szalai in London. "No one wants to be left behind by consolidation, so the big players are all weighing up their options." As the only company, so far, to put forward a bid, Kraft remains the favorite to land the British candymaker. Under its Nov. 9 proposal, which Cadbury rejected as "derisory," Kraft tried to entice shareholders with a cash-and-stock offer valued at $16.5 billion. And on Nov. 23, rumors abounded the U.S. food giant would increase its bid to win over investors. Despite concerns the takeover would overstretch Kraft's finances, the Cadbury deal would help the U.S. company keep pace with rival Nestlé, which already has a well-established chocolate business. Kraft reported a 5.7% decline in third-quarter revenues to $9.8 billion, so it would benefit from Cadbury's fast-growing emerging-market business, which recorded a 16.1% revenue increase last year (the latest figures available) vs. 5.2% in the Western world. "Kraft continues to be the leader of the pack for Cadbury," says Jeremy Batstone-Carr, director of private client research at stockbrokers Charles Stanley (CAY.L) in London. Catching UpThe U.S. food giant may be ahead, but others are nipping at its heels. Italy's Ferrero, which owns brands like Kinder, Nutella, and Tic Tacs, has expressed interest—and could team up with Hershey to bid for the British candymaker. Euromonitor's Szalai says the privately held company has a large footprint across continental Europe, and recently expanded into Russia, where it now holds a 4.3% market share. A Cadbury link-up could extend Ferrero's business across emerging market, though analysts reckon the company could struggle to finance a takeover. Ferrero typically hasn't expanded through multibillion-dollar acquisitions, and the extra leverage needed to fund a potential takeover could leave the firm exposed to takeover by another party. Analyst Alex Malloy of Credit Suisse (CS) figures a combined Ferrero-Hershey bid could raise roughly $12.5 billion by increasing the debt-to-capital ratios at both companies. But that still wouldn't match Kraft's existing offer, and would put extra pressure on both firms' finances. A similar problem confronts Hershey, which also has expressed interest in pursuing its own takeover of Cadbury. The merger certainly would diversify Hershey's business, which currently derives 86% of its revenues from North America. The U.S company also holds the license to produce Cadbury's products in the America. The potential link-up would give the combined candymaker a dominant position in the Americas, Europe, and across much of the developing world. Yet Charles Stanley's Batstone-Carr reckons Hershey may fall short if it tries to fund the deal on its own. The company's complex management structure, which gives the Hershey Trust control over one-third of the company's shares and roughly 80% of the voting rights, could make it difficult to tap investors for capital. "It would involve a messy cash-raising exercise, and I don't think they can manage it," he says. Coming Up with the MoneyTo make the deal work, analysts speculate that Hershey might team up with Nestlé. Under European Union antitrust law, the Swiss food giant, which already owns candy businesses across the continent, likely would have to divest assets if it made a solo bid for Cadbury. But under a potential joint takeover, Hershey could walk away with the chocolate business, while Nestlé pocketed Cadbury's gum operations. Financing the bid also shouldn't be a problem after Nestlé finalizes the sale of its 52% stake in eye-care firm Alcon (ACL) to Novartis (NVS) for up to $28 billion. The companies declined to comment on the takeover rumors. With so much attention focused on Cadbury, analysts expect a deal by early 2010. And while the British candymaker is adamant it can continue on its own, others warn it won't be able to compete in the consolidating global confectionery market. "For now, Cadbury may be able to defend itself," says Charles Stanley's Batstone-Carr. "But sooner or later, its performance will start to struggle."