Britain's Cadbury has few options but to look for a higher bid and more cash after Kraft's 10.2 billion pound ($16.7 billion) offer for the world's No 2 confectionery group, analysts said on Tuesday.
Investors like the logic of the combination and few, if any, counterbidders are seen likely to emerge, raising the pressure on Cadbury's management to do a deal at the right price.
Kraft launched its bid on Monday at 300p cash and 0.2589 new Kraft shares per Cadbury share, valuing the British group at 745p at Kraft's Friday closing share price, with the U.S. group seeing annual deal cost savings of $625 million.
We expect Cadbury's management to mount an aggressive defense, but confess to seeing few options on the table as a standalone company that would get the share price to 745p, let alone if there were a higher offer, said Warren Ackerman at Evolution Securities.
The bid from Kraft on Monday is seen as an opening low shot in a bidding battle, and Cadbury's shareholders will not be keen on 60 percent of the price, or around $10 billion, coming in the form of Kraft's U.S.-listed shares, analysts said, adding that investors would prefer more cash.
We think Kraft is underbidding the potential synergies and see the high Kraft equity component to the consideration as a deterrent for Cadbury shareholders, said Martin Deboo at Investec Securities.
JP Morgan expected a raised bid of 820p while Banc of America-Merrill Lynch saw 820-830p. The value of the cash and paper bid will fall if Kraft shares dip as they open later Tuesday for the first time since the bid. Kraft shares were down 2.1 percent in premarket trading on Tuesday.
Cadbury shares were up 2.2 percent at 800p at 1150 GMT (7:50 a.m. EDT) after a hefty rise of 38 percent on Monday when they touched 808p. Kraft shares did not trade on Monday due to a market holiday.
We see the proposal of 745p as an opening shot by Kraft. A price of 850-875p, comparable with other major food deals, we think is needed to win the day, said food industry analyst Charlie Mills at brokers Credit Suisse.
NO BIDDING WAR
Kepler analyst Jon Cox said he did not believe a bidding war will emerge, given that Nestle, which is pretty much the only company with the financial resources to make a bid, has signaled it is not interested.
Nestle Chief Executive Paul Bulcke said on Monday he was open to opportunities if they fit strategically, but reiterated the group did not plan any big acquisitions in 2009 or 2010.
Kraft wants Cadbury and we presume the two sides will settle at 850p per share or 14 times 2009 estimated EV/EBITDA, said Cox.
Some analysts say Nestle may get together with Hershey with Nestle taking Cadbury's gums and Hershey the chocolate to get around anti-trust problems in chocolate.
Kraft is looking at a Cadbury deal to become the world's biggest confectionery group, tapping into Cadbury's big emerging market exposure, and boosting the U.S. group's overall growth rate in a deal which should encounter few anti-trust problems.
The move would catapult Kraft to global No 1 in confectionery with a 14.8 percent share ahead of Mars-Wrigley's 14.6 percent as it would join together Kraft's No 5 position with a 4.7 percent share and Cadbury's No 2 global position.
Kraft's Milka chocolate brand is one of the U.S. group's nine brands with sales of over $1 billion while it has smaller brands like Toblerone, Cote D'Or, Terry's and Suchard, to join with Cadbury's Dairy Milk, Trident gum and Halls cough sweets.
Kraft is the world's second biggest food group after Nestle with 2008 sales of around $42 billion, dwarfing Cadbury's $11 billion, and it boosted its snacks business with the acquisition of Danone's biscuits in 2007.
Credit Suisse's Mills said the current Kraft offer equates to 12.5 times his 2009 EBITDA forecast for Cadbury, compared to an average price of 14 times for big food deals over the last 10 years, though Wrigley was bought by Mars last year at a more giddy price of 17.6 times.
Putting Cadbury shares on a Wrigley deal multiple would equate to a price of 11 pounds, Mills said.
(Reporting by David Jones; editing by Sitaraman Shankar)