Page last updated at 00:00 GMT, Thursday, 24 December 2009

Cadbury's fight for independence

By Edwin Lane
Business reporter, BBC News

Cadbury dairy milk bar
Cadbury is subject to a 10bn hostile takeover bid from Kraft Foods

After 180 years as an icon of British business, Cadbury will end 2009 and enter 2010 facing a fight for its independence.

The threat comes from Kraft Foods, the US food giant behind brands such as Oreo and Dairylea, which is now intent on a hostile takeover of the company.

The move has prompted widespread alarm among staff, trade unions, MPs and even members of the Cadbury family, calling for Cadbury to remain in British hands.

"[Kraft] won't understand the history and quality of the company," Felicity Loudon, a descendent of the company's founder, George Cadbury, told the BBC recently.

In November, MPs from Birmingham, where Cadbury is based, even tabled a House of Commons motion calling for government support to keep Cadbury in the hands of "an innovative British company".

And Cadbury's has entered into talks with US sweets firm Hershey about a deal that would help it escape the Kraft bid.

The right price

The government can do little to stop the takeover, however. The decision about whether or not it goes ahead rests with the long list of investment banks and pension funds that make up Cadbury's shareholders.

And whether or not they agree to the deal has little to do with nostalgia, heritage or tradition.

"The nationality of the bidder doesn't make any difference - particularly as a large proportion of the shareholders are based in the US anyway," says James Targett, an analyst at Consumer Equity Research.

"The most important thing for shareholders is whether any bid represents good value. If the price is right, they will take it."

So what is the right price?

Cadbury has been a hugely successful company in its own right
John Giles, director, Promar International

Kraft is currently offering to buy Cadbury shares for £3 a piece, plus 0.26 new Kraft shares. That values the company at about £9.8bn, or £7.30 per share.

The Cadbury board, lead by chairman Roger Carr, has called the offer "derisory", saying that it "substantially undervalues Cadbury".

Their argument is that shareholders stand to make a lot more money by holding on to their shares and watching their value rise as Cadbury grows and succeeds - as an independent company.

That's not an unreasonable argument, according to John Giles, a director at Promar International, a food industry research company.

"Cadbury has been a hugely successful company in its own right," he says.

"It has strong brands, a strong record of growth, it is outperforming the market, it has a strong presence in emerging markets and it's profitable."

Cadbury says its expects to grow revenues by between 5% and 7% over the next few years. Profit margins, it says, are expected to increase to between 16% and 18% by 2013.

Martin Deboo, the consumer goods analyst at the investment bank Investec, says these numbers are "plausible and achievable".

"They're at the top end of the scale," he says. "But they are not off it."

Who needs Kraft?

That prospect of growth is, of course, what attracted Kraft to Cadbury in the first place.

The Cadbury board has been eager to point out that "Kraft needs Cadbury, but Cadbury does not need Kraft".

Kraft product
The Kraft logo is familiar on shop shelves in the UK and the US

Kraft is a low-growth company with a heavy dependence on the North American market.

Cadbury, on the other hand, has done a good job of accessing developing markets where demand for its products - particularly chewing gum - is still growing strongly.

That does not mean a Kraft takeover is entirely without merit.

It points to the huge cost savings it could make by giving Cadbury access to its global distribution networks, as well as sharing research and development costs.

It also points out that its offer provides shareholders with the "certainty" of a concrete price for their shares - so they don't have to take the risk of trusting the Cadbury board to deliver on their promises.

Deal or no deal?

Shareholders have until 5 January to decide if they will accept the Kraft offer.

The consensus of opinion among City analysts is that the offer, at £7.30 a share, is just too low for shareholders to say yes to.

"At the current price being offered by Kraft, it's unlikely that shareholders will go for it," says Investec's Martin Deboo.

"What Cadbury shareholders need to think about now is what to do if Kraft comes back with an improved offer."

An offer in excess of £8 a share would create "much more of a dilemma for shareholders", Mr Deboo adds, with other analysts suggesting an offer of £8.20 a share would seriously attract shareholder interest.

"If shareholders get a sniff of £8.20, they will be obliged to sit down and talk," says David Buik of BGC Partners.

James Targett from Consumer Equity Research says Kraft will be prepared to pay more, especially if rumours of a rival bid from US confectioner Hershey are proved accurate.

"Kraft sees Cadbury as an important part of their future strategy," he says.

"It is determined to get the deal done."

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