Shares in Cadbury soared by nearly 40 per cent yesterday after the confectioner rejected a £10.2bn approach from its US rival Kraft Foods.
Kraft was proposing to pay 300p in cash and 0.2589 new Kraft shares for each Cadbury share, valuing the company at 745p per share – 31 per cent higher than Friday's closing price.
But the board unanimously rejected the proposal, claiming that the deal fundamentally undervalued the business. "Kraft has made a hugely opportunistic approach at a time when market values are depressed because of the economic conditions," one insider said yesterday.
Kraft, however, is unlikely to give up. The company – which includes Kenco Coffee, Chocolate Orange and Oreo cookies in its portfolio – confirmed a commitment to "working toward a recommended transaction " yesterday. It also said it planned to save Cadbury's Somerdale chocolate factory near Bristol, which employs 500 people and is to be closed next year, and invest in the Bournville plant.
Irene Rosenfeld, Kraft's chief executive, said: "This proposed combination is about growth. We are eager to build upon Cadbury's iconic brands and strong British heritage through increased investment and innovation."
The deal would create a combined group with revenues of $50bn (£31bn) and synergies of $625m, Kraft says. It would boost the group's sales growth target from 4 to 5 per cent, and its earnings per share guidance from the 7 to 9 per cent range to 9 to 11 per cent.
Cadbury is unlikely to warm to anything under 800p per share, but ultimately the Kraft deal is a logical one, said Graham Jones, an analyst at Panmure Gordon. "This is a very clever move from Kraft," he said. "Strategically it makes a lot of sense because the combined group would be the global leader in confectionery, and would be 70 per cent larger than its nearest rival in rapidly growing emerging markets."
Although yesterday's 37.8 per cent spike in the share price suggests surprise, Cadbury has been vulnerable to a bid since it demerged from the Schweppes drinks business in 2008. "The demerger was a brave move because it was putting the confectionery business into play," Mr Jones said. "The beverage business was effectively a poison pill because no one wanted it except Coke or Pepsi, and there the regulatory hurdles were too high."
With Schweppes out of the way – and with the newly liberated confectionery arm's "Vision in Action" margin growth programme not due to hit its mid-teen target until 2011 – Cadbury looked like a prime target. Confectionery is a highly attractive market: it is the world's fourth biggest packaged foods sector, generating more brand loyalty than any other food group, and has the distinct advantage of making a significant proportion of its sales outside the main supermarkets.
Within that, Cadbury has its own sweet spot, showing consistently strong growth and with a world-leading position before last year's $23bn tie-up between Mars and Wrigley. "If Cadbury had not wanted this scenario then it could have left the demerger for a few years until it had sorted out the confectionery margins," Mr Jones said.
A key question affecting the outcome of the tussle with Kraft will be whether the US group has any challengers. Paul Bulcke, Nestlé's chief executive, yesterday appeared to rule out a bid. "We are always open for opportunities but we have no plans for any major acquisitions in 2009 and 2010," he said.
But industry commentators were not convinced, and one possibility gaining ground in the City was a bid from a consortium of Nestlé and Hershey, which would avoid the regulatory issues over chocolate of a straight Nestlé/Cadbury takeover. The reaction of Kraft's shares when the New York Stock Exchange opens today after yesterday's Labour Day holiday will also play a role in the final price of any bid.
The other factor complicating a valuation of Cadbury is the comparison with last year's Mars/Wrigley deal. Mars paid 3.7 times Wrigley's sales and 32 times its earnings.
Even an £8 per share offer for Cadbury would only represent twice its sales and 20 times its earnings.