Cadbury’s UK shareholders piled the pressure on the confectionery group last night to deliver a comprehensive defence against Kraft’s hostile bid as they said that the US predator must pay up to stand a chance of success.
As well as urging Kraft to add at least £1 a share in cash to its bid, institutional investors said that Cadbury’s management needed to pull out the stops to justify staying independent.
“If Kraft doesn’t offer enough and a deal doesn’t happen, Cadbury will receive support from investors, but they need to lay out a very strong case,” a leading shareholder said. “In theory, there is more margin to deliver and a second round of targets should be set. They need another leg to their story.”
Investors said that Cadbury’s executive line-up, led by Todd Stitzer, was “not the most popular team in town” after last year’s stop-start demerger of the Schweppes drinks unit. The action was forced on the company by Nelson Peltz, the activist investor, and then put on hold because of the credit crisis.
They added that Andrew Bonfield, the former Bristol-Myers Squibb finance director named as Cadbury’s finance chief last December, remained an “unknown quantity” but would be crucial in generating new targets for profit margins. “That team needs to deliver big time,” another investor said.
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British shareholders in Cadbury described Kraft’s formal cash-and-shares offer yesterday as an “opening gambit”. “Now it’s game on,” one said. “Tactically, this is quite sensible and it gives Kraft optionality. It will get to state its case to investors and to see what Cadbury’s defence is. Now they have gone formal, we will also see if there will be a counter-bidder. There is no point raising the offer now as they would have been bidding against themselves. This way Kraft can always raise the bid at a later stage.”
Kevin Dreyer, research analyst and associate portfolio manager at Gamco Asset Management, which owns just over 1 per cent of Cadbury mainly through American depository receipts (ADRs), said that Kraft’s offer was low, given Cadbury’s brands and growth prospects. “The current offer strikes me as relatively low as opposed to other confectionary acquisitions as well as some other acquisitions Kraft has done,” he said.
Investors said that a deal at 820p to 830p would probably meet with approval in Britain. A top ten investor in Cadbury said: “If there is 800p-plus on the table [per share], it is going to be difficult for Cadbury shareholders to walk away from that — but that is not what is on the table at the moment.”
A top 25 investor in the company said: “I think something closer to 900p — not scraping over 800p — will have us scrambling for our calculators. While it would be possibly unrealistic for Kraft to think that’s what they want to pay, they have to consider that it may be unrealistic that anyone is going to sell it to them at that price.”
Investors said they were worried that, with a counter-bidder unlikely to materialise, Cadbury’s share price would collapse if Kraft were to walk away.
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“If you take the takeover potential out of Cadbury’s price, I can see it falling well below 700p, even below 600p,” one said.
Investors also expect Kraft to come under intense pressure from its own shareholders not to overpay. “Taking account of their long-term synergy targets, we can see how they could get to £9 a share as a value for Cadbury’s, but why pay all that now?” one asked.
UK institutional investors said the share component of Kraft’s offer made it unattractive. Many funds are prohibited from owning shares in overseas companies and would have to sell Kraft stock immediately, probably at a loss.