Kraft and Cadbury … a bittersweet mix.

Takeaway: On a day where Advanced Marketing Strategy students were asked to come up with the appropriate bid for Dewey the Cat, it is fitting to revisit the seemingly sweet Kraft hostile bid for Cadbury that quickly turned sour.

While this deal makes business sense, as Kraft will be able to more easily penetrate emerging markets and take advantage of scale economies, the inability of both sides to agree on the proper value of Cadbury struck this deal down.

A falling Kraft share price makes the deal even less attractive to Cadbury shareholders today. Who knows, maybe if Kraft had utilized discovery driven planning to determine the value of the acquisition, it could have induced shareholders to bite the cheese…

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Excerpted from BusinessWeek, “Kraft: Is Cadbury the Missing Global Ingredient?” by Ben Steverman, November 9, 2009

If you boil down the motivations behind Kraft Foods’ (KFT) hostile bid for Cadbury (CBY), you reach an undeniable fact: People all over the world love candy, gum, and chocolate.

Because confections have little store-brand competition and sales stay steady even during downturns, food companies such as Kraft envy Cadbury’s profit margins. A further factor makes them envy its growth prospects: Candy travels well.

Cadbury: access to emerging economies

Kraft macaroni-and-cheese may be an American favorite, but it won’t necessarily catch on in China or India. Sweets are different. Around the world, “candy seems to attract consumers who want to try new things,” Van Horn says.

Cadbury has built a global business with access to the emerging economies that Kraft wants to penetrate.

The question, however, is how much Kraft is willing to pay for all this. On Nov. 9, Kraft submitted a hostile bid for Cadbury on the same terms as a September offer that was rejected. The offer valued Cadbury at £9.8 billion, or $16.4 billion in cash and stock. But because the value of Kraft’s shares has been falling, the offer of 717 British pence per share was worth about 4% less than it was two months ago.

Shareholder Buffett: Don’t overpay

On the one hand, a Cadbury acquisition would bring benefits to Kraft. But Kraft has said it doesn’t want to pay so much that it risks its credit rating or dividend. On Nov. 9, Standard & Poor’s said that Kraft’s credit rating remains on “creditwatch with negative implications,” due to the bid.

Kraft’s bid has encountered resistance in Britain from those who don’t want to see a U.S. buyer for a treasured company. One Cadbury heir has called Kraft “an American plastic cheese company.”

By combining her company with Cadbury, Kraft Chairman and Chief Executive Irene Rosenfeld would achieve the size and global reach to compete with such rivals as Nestlé (NESN). She says the new company could find $625 million in savings and synergies and would help Kraft better access markets in India, South Africa, and Mexico.

Economies of scale in food businesses

“Purchasing Cadbury would fast-forward Kraft’s bid to build a larger emerging-market presence and would no doubt offer an infrastructure [in key countries] that would take years to build and perfect on its own,” wrote Stifel Nicolaus (SF) analyst Christopher Growe on Nov. 9.

Size is an advantage in the food business, where economies of scale can be significant, says Steven Rogé, portfolio manager at R.W. Rogé & Co. Size also helps a company negotiate with giant retailers and suppliers. “In an age when you’re trying to sell to the Wal-Marts (WMT) of the world, you need size and scale,” Rogé says.

The dealmaking will test the future of Kraft’s growth strategy as it determines the value of Cadbury’s global reach and lucrative confection brands. Meanwhile, Cadbury shareholders must decide if they’re willing to risk a loss in stock price to keep the company independent.

Edit by JMZ

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Full Article:
http://www.businessweek.com/investor/content/nov2009/pi2009119_839315.htm