Cadbury beat sales forecasts and raised targets in a bumper third-quarter trading report, pushing up its shares and pressuring suitor Kraft to come up with a bigger bid to win its takeover battle.
The London-based confectionery group said on Wednesday underlying sales rose 7 percent in the July-September quarter, beating even the most bullish forecasts, and unexpectedly increased both its sales and margin growth targets for 2009.
Cadbury shares initially rose 1.2 percent to 808.95 pence, the highest since its 2008 soft drinks demerger, and well above Kraft's current cash and share offer worth 726 pence.
But they drifted back to stand barely changed at a fraction below 800 pence by 1135 GMT (7:35 a.m. EDT) on concern the margin improvements were helped by lower marketing spend and the view that without a competing bid for Cadbury, Kraft was unlikely to raise its bid.
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Why would Kraft bid against themselves? Cadbury shareholders will have to balance the hope of a higher bid against Kraft walking away, said one analyst.
A Kraft spokesman declined to comment on the update while in Frankfurt Kraft was up 0.5 percent at 18.31 euros.
Analysts pushed their forecasts for a successful bid by Kraft for the world's second largest confectionery group toward the top end of their previous 850-900 pence range, with some believing a white knight bidder may still emerge.
We think this statement, plus confidence expressed about 2010 and 2011, significantly reduced the chance of Cadbury being acquired on the cheap and as such we raise our target price from 860p to 900p, said Graham Jones at brokers Panmure Gordon.
Warren Ackerman at Evolution Securities said, We think a successful bid for Kraft may need to start with a 9 rather than 8. After Cadbury's blowout performance he said Kraft may have to increase the cash element of its bid to 500 pence from 300.
Cadbury has repeatedly rejected Kraft's 10.2 billion pound cash and shares proposal made in early September and the UK Takeover Panel has given Kraft a deadline of November 9 to come up with a firm bid or walk away for six months.
Chief Executive Todd Stitzer gave an upbeat outlook as the group returned to more normal growth rates and saw at least 5 percent underlying sales growth in 2010 and 2011, but made no mention of the proposed multi-billion pound bid from Kraft.
We have the momentum and the growth, Stitzer told a telephone briefing after the update, adding the group had delivered growth in every category and business in the quarter.
Cadbury's trading was boosted by a sharp rebound in gum and candy after seeing flat growth in the first half, with gum up 4 percent and candy 11 percent, which helped to boost overall margins over lower-margin chocolate sales.
Growth in chocolate, which accounts for nearly half Cadbury's worldwide sales, slowed to 7 percent from the first-half's 10 percent but was supported by the launch of Wispa Gold bars in Britain and growth in India and South Africa.
Some analysts pointed out marketing spend as a percentage of sales fell to help margins and this could reverse in the fourth quarter while third quarter volumes fell 3 percent meaning Cadbury had to rely on price rises for its 7 percent sale rise.
Most analysts had expected Cadbury to report 4 percent third-quarter sales growth and hold its 2009 sales target at the lower end of its 4 to 6 percent medium-term range and either hold or slightly nudge up its annual margin target.
Kraft's takeover proposal of 40 percent cash and the rest in new Kraft shares valued Cadbury shares initially at 745 pence or 10.2 billion pounds ($16.8 billion), but the fall in Kraft shares makes it currently worth 726 pence, over 70 pence below the current Cadbury share price.
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Analysts believe Kraft will wait until after its own third-quarter earnings on November 3 before raising its bid. Many analysts expect it to come back with an offer of at least 850 pence and more likely toward 900 pence, including half in cash, to win the backing of Cadbury's board and avoid a hostile bid.
(Editing by David Cowell)