Cash, not stock, said key to Cadbury deal

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 any other potential suitors will put more cash on the line, which could prove key to a deal.

Cadbury, No. 2 behind Mars Inc. among global candy-makers, quickly rejected the surprise offer by Kraft on Monday, saying the offer fundamentally undervalues the company. But Kraft CEO Irene Rosenfeld is continuing to make a case for the deal, which would expand Kraft’s global footprint.

Kraft, the world’s second-largest food-maker, said Tuesday that it plans to continue discussions with Cadbury and will try to keep the efforts “friendly.” Ms. 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 & Co. Inc. analyst Christopher Growe wrote in a note to investors Tuesday.

Kraft shares fell $1.64, or 5.8 percent, in the first day of U.S. trading since the offer became public. Cadbury shares rose on the London Stock Exchange after rising sharply Monday.

The lure of the candy sector is strong right now, as its products have higher profit margins than some other packaged foods. It is also considered an affordable luxury, particularly important in a recession. And Cadbury has an established presence in many developing countries, such as India.

Cadbury’s rejection of the bid, however, opens the door to discussions with others. Analysts suggest candy companies Nestle SA and Hershey Co. may come together to consider making a bid of their own.

The key to a successful deal could be cash. Kraft proposed paying $4.95 in cash and 0.2589 new Kraft shares per Cadbury share. The offer is a more than 30 percent premium over Cadbury’s closing price Friday, but the overall deal is heavily dependent on the stock portion of the offer.

Some analysts say cash may prove more important as Cadbury’s investors have limits on how much U.S. stock they can hold. But Kraft dismissed the concerns, saying the company has an array of international and U.S. 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 offering or discuss a possible hostile move.

The Northfield, Ill.-based company said it does not think it will have any 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.

As for competing bids, Hershey wouldn’t be likely to make a bid on its own because of its smaller size and complications with its ownership. But a joint bid by Hershey and Nestle makes sense, said Edward Jones analyst Matt Arnold.

Nestle could assume control of Cadbury’s gum business, and Hershey could absorb its chocolate business - avoiding antitrust issues that Nestle may encounter by taking on the chocolate brands and giving Hershey the added size and financial weight it needs to make a deal.

Hershey and Nestle declined to comment.