Sweet! Putting Kraft Foods and Cadbury together makes a mouth-watering confection. But Kraft will have to make its proposal sweeter still to take the candy; its 745p-a-share approach, rejected by its UK target and already outstripped by the market price, is a mere starting point. Rivals could also make a grab for the chocolate box.
A tie-up would tick several strategic boxes. Thanks to Cadbury's British Commonwealth heritage and 2003 acquisition of Adams, a gum business big in Latin America, it brings an emerging market strength that Kraft has long lacked. The combined group would be a significant force in Brazil, Russia and China. Elsewhere, joining Kraft's clout with grocers, such as Wal-Mart, to Cadbury's mastery of “instant consumption” channels – convenience stores and newsagents – should pump up the top line. Estimated cost synergies of $625m look achievable; taxed and capitalised, they are worth some $4.4bn, which covers Kraft's 31 per cent premium.
Yet Kraft, a food conglomerate struggling to grow, needs the deal more than Cadbury. Kraft says absorbing Cadbury would increase its revenue growth target by a percentage point to 5 per cent and earnings per share by two percentage points. Yet Cadbury is only a quarter its size. Kraft is also offering an enterprise value of 13 times 2009 earnings before interest, tax, depreciation and amortisation, below recent big food industry deals.