Likely bid war for Cadbury sends shares to record high

Simon English
23 Nov 2009

Cadbury shares hit another record high today as investors bet that a fierce bidding war for control of the 185-year-old company could breakout.

With Kraft poised to up its low-ball deal worth around 720p a share and rivals circling, Cadbury put on 12½p to 813p by early afternoon.

As the shares rose, Nestlé began talks with its bankers to work on a possible knockout bid for Cadbury that could transform the global confectionary market.

With Cadbury on the receiving end of an unwelcome £9.8 billion bid from Kraft Foods, its board of directors may be hoping for a white knight offer that could fend off the US giant, though in public it insists it is merely interested in the highest possible bid.

US chocolate company Hershey is also working on a deal but there are mounting fears it may lack sufficient financial power to come up with a credible alternative to Kraft.

Nestlé's board, headed by chief executive Paul Bulcke, is meeting to consider its position, fearful that a combined Kraft/Cadbury could threaten its market share and profits.

One option could be to link up with Hershey and split Cadbury's business between them — Hershey taking the chocolate arm and Nestlé the gum business — to assuage competition concerns. Chewing gum is about 35% of Cadbury's business, a market in which Nestlé is presently weak.

Ferrero, the Italian family-owned outfit best known for Ferrero Rocher, was last week pondering its own joint bid with Hershey but is now thought unlikely to get involved.

Over the weekend Cadbury further distanced itself from a link up with Kraft. Chairman Roger Carr said that the bid, which is only 40% in cash valued, “showed contempt” for Cadbury investors.

That makes it difficult for Cadbury to open formal talks with Kraft unless it comes back with a much higher offer. Kraft is likely to wait until rivals make a move before it raises its own bid.

Investec analyst Martin Deboo told clients: “We think the probability of a competitive auction for Cadbury has increased. We increase our target price to 810 pence from 785 which reflects our weighted average view of the end-game probabilities.”

Jeremy Batstone-Carr at Charles Stanley said: “The Cadbury share price remains comfortably above the level of Kraft's hostile offer. This clearly implies that the market views the chances of either a rival suitor or a higher offer from Kraft as being highly likely.”

Hershey is this week in talks with the charitable trust that owns a third of its stock but 80% of the voting rights. The trust is keen Hershey push on with a bid but wants to ensure it would keep control of the new company after a deal was secured.

Observers say the trust board members may be too nervous to give any deal the go-ahead, due to concern that it would load the company with debt.