Thanks to Ferrero and Hershey, Cadbury may finally have a bargaining position.
Italy's Ferrero and U.S.-based Hershey, hich both make small foil-wrapped chocolates imprinted with their names, confirmed on Wednesday they were considering a bid for Cadbury that could rival a $16.6 billion hostile offer from Kraft Foods Inc.
The two companies said there was no guarantee they would end up making an offer, and gave no details whether a proposal would be friendly. Sources said they were mulling a joint bid.
But the mere hint of a potential rival offer -- which until now seemed unlikely -- could give Cadbury leverage to pry more money from Kraft, a source familiar with the situation said. The source declined to be named because he was not authorized to speak with the media.
Until now, Cadbury has stressed its growth prospects as an independent player to mollify investors who would view a sweetened Kraft bid as attractive. Last month, Cadbury posted strong quarterly results and raised both its sales and margin growth targets for 2009.
Its message has been that it is growing and doesn't need to be part of a massive, slower growth American food conglomerate, said a second source familiar with the matter.
But that defense strategy came under pressure. As Kraft persisted in a waiting game since it made its offer public in early September and refused to sweeten its bid, Cadbury investors' hopes for a much higher offer receded.
By early November, some investors said an offer close to 800 pence per share would be attractive, above the value of Kraft's cash and stock bid of around 724p, but well below initial hopes of as much as 900p per share.
The Cadbury board is right in rejecting this offer, although the risk/reward is looking less and less favorable for Cadbury, a top ten investor in Cadbury said last week when Kraft took its bid hostile.
On Wednesday, news of the Hershey-Ferrero interest pushed Cadbury shares above the 800p mark for the first time in nearly a month, widening the premium built into its stock to more than 10 percent over the Kraft offer.
MORE FAT TO TRIM
Cadbury has also been focusing on trimming expenses, improving its cost structure and simplifying its manufacturing base, said Erin Swanson, an equity analyst with Morningstar. But it can do more in its case against Kraft.
There is fat to be cut there. They have just been scratching the surface, said Swanson.
Those moves, along with the benefit of the holiday selling season, could boost Cadbury's fourth-quarter results and help sway shareholders to rebuff takeover advances, analysts said.
Under UK takeover rules, Cadbury cannot do anything to unnecessarily frustrate the Kraft bid such as adopting a poison-pill anti-takeover measure. It could, however, entertain a new offer if Ferrero and Hershey made a formal bid.
Cadbury had not yet been contacted by Ferrero, a third person familiar with the situation said on Tuesday.
It's not impossible, but we would be skeptical, said analyst Alex Molloy at brokers Credit Suisse of the potential for a Ferrero or Hershey bid to succeed.
A U.S. hedge fund that is invested in both Cadbury and Kraft described Ferrero as a fiercely independent and traditionally conservative company that would be unable to bid for Cadbury on its own because it is too small.
It would need to offer a premium to Kraft's final bid, which could be nearing $20 billion. It would struggle to get finance and the math would not work, the hedge fund manager said.
On the other hand, Hershey and Ferrero may find it hard to join forces because they essentially want the same asset.
Hershey and Ferrero would be difficult because they would both want Cadbury's chocolate business, one industry banker said.
The banker said that if Ferrero and its fellow investors decide to pursue Cadbury in earnest they would probably wait until after Kraft had posted its offer documents to Cadbury shareholders next month before going public with their intentions.
A friendly deal between Cadbury and its two new suitors, Ferrero and Hershey, has many challenges, analysts said. But even the complication of a consortium deal, Hershey's ownership by a charitable trust and Ferrero's family ownership may be easier than getting Cadbury on board.
At the end of the day, Cadbury wants to remain independent, said a source familiar with the situation.