Bottom Line: Pie in the sky for the moment

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The Independent Online
THE MERE thought of a pounds 3bn-odd mega takeover is enough to excite the City into a frenzy nowadays. The prospect of a tie-up between Cadbury Schweppes and United Biscuits is more than enough to set mouths watering among investors, stockbrokers, merchant bankers, lawyers and others.

Yesterday, UB shares jumped 7.3 per cent to 428p, and Cadbury dropped back from 479p to 471p. Five times the usual number of UB shares were traded while turnover in Cadbury was three times the average level.

In truth, the chances of this deal becoming reality are slim. Though UB's five-year earnings record is flat, Cadbury is too cautious a company to offer the kind of price UB's board would feel able to recommend to shareholders.

That is not to say a merged group lacks strategic merit. The two inhabit the same sector of the food industry, without there being much cross-over to worry the competition authorities. Cadbury is sweets and soft drinks, while UB is biscuits and crisps.

The two companies could share sourcing of raw material (mostly sugar and flour); marketing of the all-important brands; and distribution. And they might benefit from greater critical mass in global competition with the likes of Philip Morris, Nestle and Nabisco. Ross Young, UB's frozen food business, does not fit, but it is now in good enough shape to sell.

Managements at both Cadbury and UB are probably as keen as anyone for a link, but cannot come anywhere near agreeing a price. For UB to accept, Cadbury would have to offer up to 25 times this year's 28p of projected earnings per share, based on recent deals in the sector. That puts an acceptable offer above 600p or a 40 per cent premium to yesterday's price.

Cadbury executives would be sensing vertigo much above 500p, particularly as UB shares were trading at 235p just eight months ago. The last thing either party wants is for UB to be put in play only to have a black knight in the shape of Philip Morris, Nestle or even Hanson come riding in with a better offer.

It would be a disappointment if Cadbury succumbed to temptation. However, both companies' shares are trading at a little over 15 times earnings, which suggests there is little risk in buying UB at these levels.

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