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PROF.RAJEE
JABAL
SUBJECT- STRATEGIC FINANCE MANAGEMENT
ABSTRACT-
Kraft Foods sealed a deal for Cadbury as the famed British chocolate maker accepted a sweetened bid
worth some US$19 billion creating a world leader in confections. Ending a bruising months-long hostile
takeover battle, Cadbury's board agreed to an improved offer valuing the British group at 11.5 billion
pounds (US$18.9 billion), or 840 pence per share, the companies said in a statement. Under the
agreement, Cadbury shareholders will also receive 10 pence per share via a special dividend, lifting
Kraft's offer to 11.9 billion pounds (US$19.5 billion). The deal would make US-based Kraft, the world's
second-biggest food company, one of the biggest global players in chocolate and confections, giving the
US group the brands of Dairy Milk and Creme Egg to go along with Kraft's Toblerone, Milka, Suchard
and Cote d'Or, among others. Investors welcomed Tuesday's news, sending Cadbury's US-listed shares up
6.14 per cent to US$55.09. Kraft shares fell 0.57 per cent to US$29.41.
"We have great respect for Cadbury’s brands, heritage and people. We believe they will thrive as
part of Kraft Foods. This recommended offer represents a compelling opportunity for Cadbury
Shareholders, providing both immediate value certainty and upside potential in the combined
company. For Kraft Foods Shareholders it transforms the portfolio, accelerates long-term growth and
delivers highly attractive returns, while maintaining financial discipline."
"We believe the offer represents good value for Cadbury shareholders and are pleased with the
commitment that Kraft Foods has made to our heritage, values and people throughout the world. We
will now work with the Kraft Foods' management to ensure the continued success and growth of the
business for the benefit of our customers, consumers and employees."
SUMMARY
Recommended Final Offer terms
• The board of Kraft Foods is pleased to announce the detailed terms of a recommended Final Offer
for Cadbury and the board of Cadbury unanimously recommends Cadbury Security holders to
accept the terms of the Final Offer.
• Under the terms of the Final Offer, Cadbury Security holders will be entitled to receive:
For each Cadbury Share 500 pence in cash and 0.1874 New Kraft Foods
Shares
For each Cadbury ADS 2,000 pence in cash and 0.7496 New Kraft
Foods Shares
Representing, in aggregate, 840 pence per Cadbury Share and GBP 33.60 per Cadbury ADS.
• In addition, Cadbury Shareholders will be entitled to receive 10 pence per Cadbury share by
way of a Special Dividend following the date on which the Final Offer becomes or is
declared unconditional.
• The terms of the Final Offer reflect the strength of Cadbury's business, its brands and the
future potential for growth through the combination of Kraft Foods and Cadbury.
• Kraft Foods believes that the Final Offer represents a compelling opportunity for Cadbury
Security holders, providing the ability to receive approximately 60 per cent. Of their
consideration in cash and long-term value creation potential through a continued
shareholding in the Combined Group.
• The Final Offer represents an attractive multiple of 13.0 times Cadbury's underlying 2009
EBITDA.
• Kraft Foods believes a combination with Cadbury will provide the potential for meaningful
cost savings and revenue synergies from which Cadbury Security holders will benefit.
Combination creates a global leader in the global foods and confectionery sector
• Kraft Foods believes a combination represents a strong and complementary strategic fit,
creating a global confectionery leader with a portfolio of more than 40 confectionery brands
each with annual sales in excess of USD 100 million.
• Kraft Foods and Cadbury have a highly complementary geographic footprint, providing the
Combined Group with a leading presence in attractive global markets.
• The Combined Group will have a leading position in developing markets, including in Brazil,
Russia, India, China, and Mexico.
• The Combined Group will benefit from important additional scale in the consolidating
confectionery segments.
• The Combined Group will have best-in-class infrastructure in both traditional and instant
consumption routes to market.
• Kraft Foods also announces that it reserves the right to, and intends to, reduce the number of
acceptances required to fulfil the Acceptance Condition from 90 per cent. to 50 per cent.
plus one Cadbury Share on or after 26 January 2010.
• The Final Offer does not require the approval of Kraft Foods Shareholders. Accordingly, the
condition relating to such approval, as set out in the Original Offer Documents, is treated as
satisfied for the purposes of the Final Offer.
• Full acceptance of the Final Offer will result in the issue of 265 million New Kraft Foods
Shares, representing approximately 18 per cent. of the existing issued share capital and 15
per cent. of the enlarged issued share capital of Kraft Foods.
• Kraft Foods announces that all of the Conditions to its recommended Final Offer have
been satisfied or waived and, accordingly, the Offer is wholly unconditional.
• The Final Offer will remain open until further notice and at least 14 days' notice will be
given if Kraft Foods decides to close the Final Offer. Cadbury Securityholders who have
not yet accepted the Offer are encouraged to do so without delay.
• Commenting on the Offer, Irene Rosenfeld, Chairman and CEO of Kraft Foods said,
“The combination of Kraft Foods and Cadbury creates a global powerhouse in snacks,
confectionery and quick meals. Together we have impressive global reach and an
unrivalled portfolio of iconic brands, with tremendous growth potential. I warmly
welcome Cadbury employees into the Kraft Foods family and look forward to meeting
many of them in the days and weeks ahead. This combined company has a phenomenal
future, and I firmly believe it will deliver outstanding returns to our shareholders.”
Level of acceptances
As at 1.00 p.m. (London time) on 2 February 2010, Kraft Foods had received valid acceptances
of the Offer in respect of a total of 987,684,041 Cadbury Shares (including those represented by
Cadbury ADSs), representing approximately 71.73 per cent. of the existing issued share capital
of Cadbury.
Following receipt of sufficient acceptances (i.e. 75 per cent.), Kraft Foods intends to procure that
Cadbury will apply for the cancellation of the listing of Cadbury Shares on the Official List and
the trading on the London Stock Exchange for listed securities. Kraft Foods also intends to
procure that, as soon as practicable, Cadbury will apply for the delisting of Cadbury ADSs from
the NYSE and that Cadbury terminates its ADS program and the Deposit Agreement. A notice
period of not less than 20 Business Days prior to delisting from the London Stock Exchange will
commence as soon as Kraft Foods has received sufficient acceptances to procure the delisting of
the Cadbury Shares. Delisting is likely to reduce significantly the liquidity and marketability of
any Cadbury Shares (including those represented by Cadbury ADSs) in respect of which the
Offer has not been accepted.
• It is also proposed that, after Cadbury Shares are delisted, Cadbury will be re-registered
as a private company.
Compulsory acquisition
Kraft Foods intends, assuming it becomes so entitled (by receiving 90 per cent. acceptances), to
acquire compulsorily any outstanding Cadbury Shares (including any Cadbury Shares
represented by Cadbury ADSs) pursuant to the provisions of the 2006 Act.
Settlement
The consideration to which any Cadbury Securityholder is entitled under the Offer will be settled
(i) in the case of complete acceptances received on or before 1 p.m. (London time) on the date
of this announcement, on or before 16 February 2010; and (ii) in the case of complete
acceptances received after the date of this announcement but while the Offer remains open for
acceptance, within 14 days of such receipt, in each case in the manner described in the Final
Offer Documents.
Cadbury Securityholders who have not yet accepted, and wish to accept, the Offer should
take action to accept the Offer as soon as possible. Details of the procedure for doing so are
set out in the Final Offer Documents (including, in the case of certificated Cadbury Shares and
Cadbury ADSs, the Final Acceptance Forms) sent to Cadbury Securityholders on 20 January
2010.
The combination of Kraft Foods and Cadbury creates a global powerhouse in snacks,
confectionery and quick meals. With annual revenues of approximately $50 billion, the
combined company is the world's second largest food company, making delicious products for
billions of consumers in more than 160 countries. The combined company's portfolio includes
11 iconic brands with revenues exceeding $1 billion - Oreo, Nabisco and LU biscuits;
Milka and Cadbury chocolates; Trident gums; Jacobs and Maxwell House coffees;
Philadelphia cream cheeses; Kraft cheeses, dinners and dressings; and Oscar Mayer meats.
Another 70+ brands generate annual revenues of more than $100 million. Kraft Foods
(www.kraftfoodscompany.com; NYSE: KFT) is a member of the Dow Jones Industrial Average,
Standard & Poor's 500, Dow Jones Sustainability Index and Ethibel Sustainability Index.
Following are the information regarding this deal.
1Management, employees and locations
. Kraft Foods believes that the combination of Cadbury and Kraft Foods represents a strong,
complementary fit and expects that the combination will enhance the Combined Group's growth
profile. The combination will augment the world-class capabilities of both Kraft Foods and Cadbury
by employing a "best of both" approach, from sales and marketing to distribution and management.
In particular, Kraft Foods believes that the global business network of the Combined Group will
create opportunities for Cadbury employees and managers.
In addition, Kraft Foods has given assurances to Cadbury that, on the Offer becoming or being
declared wholly unconditional, the existing contractual employment rights, including pension rights,
of all Cadbury Group employees will be fully safeguarded
Kraft Foods believes that the Final Offer will deliver the following key benefits:
• Accretion to earnings per share in 2011 of approximately USD 0.05 on a cash basis; and
• A mid teens return on investment, well in excess of Kraft Foods’ cost of capital.
Kraft Foods believes that the Final Offer is consistent with its commitment to maintain a financially
disciplined approach and is well within the key criteria outlined in Kraft Foods’ announcement of a
possible offer for Cadbury on 7 September 2009:
• Accretion to earnings in the second year following completion on a cash basis (which excludes
the one-time costs to achieve synergies and expenses related to the transaction and the impact
of non-cash items such as the amortization of intangibles after acquisition);
• A return on investment in excess of Kraft Foods' cost of capital within an acceptable timeframe;
Following the combination with Cadbury, Kraft Foods expects to revise its long-term growth targets
to 5+ per cent. for revenue and 9-11 per cent. for earnings per share, from its previously announced
4+ per cent. and 7-9 per cent. respectively.(
In addition, the acquisition is expected to enhance the quality of the Combined Group's earnings,
and create a business with strong discretionary cash flow generation and attractive revenue
growth prospects across a diversified portfolio of brands and product groups worldwide.
Lazard & Co., Limited, Centerview Partners UK LLP, Citigroup Global Markets Limited and
Deutsche Bank AG, London Branch are satisfied that sufficient resources are available to Kraft
Foods to satisfy in full the cash consideration payable by it as a result of full acceptance of the Final
Offer.
Kraft management branded the proposed acquisition as the company’s strategic move to build a global
powerhouse in snacks, confectionery, and quick meals. Specifically, Kraft believes combining
KFT&CBY can be justified by the following value propositions:
1. The combined company could target long-term organic revenue growth in excess of 5% and
sustainable long-term EPS growth of 9 to 11%, whereas Kraft targets long-term organic revenue growth
of 4% and EPS growth of 7 to 9% on a standalone basis.
2. The higher long-term growth rates in revenues and bottom lines will be driven by revenue synergies
and $625 million identified annual cost savings.
3. Cadbury is highly complementary to Kraft’s geographical footprint and will increase developing
markets’ contribution to Kraft’s net revenue from about 20% to about 25%.
Kraft management has been banging the familiar synergy/strategy drum hard regarding the significance
of the acquisition, and claims itself a disciplined buyer. While increasing exposure to developing markets
does sound appealing and increasing top line growth by 1% on a large revenue base is worthy of
applause, we are not sure those promises justify the price tag. Based on the proposed price of 745 pence
per ordinary share or approximately $50 per ADR, CBY needs to deliver top line growth of 10% and
EBITDA margins of 27% each year from 2010 to 2014 to justify the purchase price. Historically, CBY’s
organic top line growth has been in the range of 4-6% and its EBITDA margins have declined from 22%
in 2004 (peak) to 15% in 2008 (trough). It doesn’t take a brain surgeon to conclude, it will be very hard
for CBY to achieve those lofty operational assumptions in the future to deserve the purchase price. If we
boldly assume all the projected $625 million annual savings will come from Cadbury and be realized,
CBY’s standalone EBITDA margin will increase by approximately 8%, still falling short of the implied
27% margin, based on its profitability track record from 2006 to 2008 (17%, 16%, and 15% respectively
each year). In other words, even if the annual cost savings assumptions are realized, it is likely that Kraft
is still overpaying for the projected cash flows CBY can bring to the table. Needless to say, as with many
deals spurred by enthusiastic I-Banker cheerleaders, Kraft may overestimate its ability to achieve the
operational excellence required to justify its own assumptions of the transaction.
Turning to Kraft Foods. On a standalone basis, if Kraft is able to deliver annualized top line growth of
4%, grow EPS at the high end of its targeted 7-9% range, and achieve higher asset efficiency via
productivity gains as management has been promising, its shares could be worth as much as $32, rather
attractive relative to their current trading levels. It seems logical for us to suggest that Kraft should focus
on improving its existing operations to maximize shareholder value, rather than overpaying for Cadbury
to achieve non-substantial incremental growth. The market seems to agree with us as well, given since the
announcement KFT has under-performed the S&P 500 by nearly 8%. In addition, Kraft will likely use $8
billion new debt to finance about half of the purchase, increasing its leverage to a higher level amid
continuous economic uncertainties. While we appreciate KFT management’s confidence in the credit
market and the overall economic environment, we are skeptical of the wisdom in pursuing the Cadbury
acquisition at this moment. Needless to say, most companies in corporate America are tirelessly
deleveraging. Management has insisted there is no threat to its existing investment-grade credit rating.
Sadly most people purchased tech stocks up to the crash, and continued to buy real estate as the bottom
fell out. In today’s environment, we turn to the wise Chinese saying, “Hope for the best, but prepare for
the worst”. Leveraging up in this environment to purchase pricey assets does not seem very wise.
The Final Offer extends to any Cadbury Shares unconditionally allotted or issued before the Final
Offer closes (or such earlier time as Kraft Foods may, subject to the rules of the Takeover Code,
decide) as a result of the exercise of options or vesting of awards granted under any of the Cadbury
Share Schemes. Appropriate proposals will be made in due course to holders of options and awards
granted under the Cadbury Share Schemes.
The benefit of Cadbury's Special Dividend of 10 pence per share will be extended to participants in
the Cadbury Share Schemes.
9. Break fee arrangement
Cadbury has agreed to pay an inducement fee of GBP 117.7 million in circumstances where a
competing offer is announced and either is recommended by Cadbury or that offer or another third
party offer becomes unconditional and the Final Offer lapses or is withdrawn, unless, prior to such
announcement, Cadbury withdraws its recommendation for reasons demonstrably unrelated to such
competing offer.
. Apart from the odd sardonic chuckle as the process unfolded (with that arch-globaliser
Mandelson shedding a few crocodile tears at another ‘great British company’ being gobbled up by
‘predators’ like Kraft – or Warren Buffet (who owns about 9% of Kraft) complaining that it’s a
really bad deal for Kraft shareholders, however good a deal it might be for Cadbury shareholders),
it’s been too bloody miserable.
The optimists would have curmudgeons like me cheer up a little. They point to the pledges made
by Kraft to stick by Cadbury’s ethical and Fair-trade commitments. Just before the Cadbury’s
Board accepted the bid it announced that Green & Black’s would be moving its entire range to
Fair-trade by the end of 2011, which elicited the following emollient words from Kraft:
Just so long as you ignore the unmistakable sound of grinding teeth behind the reassuring words,
perhaps that really is something to be optimistic about. But it is still a wretched outcome. And
surely a complete failure on the part of Cadbury’s shareholders to tell the difference between ‘a
good price’ and ‘lasting value’.
The interesting thing is that employee-owned companies regularly outperform those in the FTSE
All-Share Index. Over the last 17 years, employee-owned companies have outperformed FTSE
All-Share companies each year by an average of 10%. In the third quarter of 2009, for instance,
employee-owned companies’ share prices were up 27.6% compared to FTSE All-Share companies
share prices, which were up 21.3% over the quarter. But we are still so stuck in our wretchedly
unsustainable ways when it comes to ownership structures within the capitalist economy.
CONCLUSION
This announcement contains forward-looking statements regarding Kraft Foods' combination with
Cadbury. Such statements include, but are not limited to, statements about the benefits of the
combination and other such statements that are not historical facts, which are or may be based on
Kraft Foods' plans, estimates and projections. These forward-looking statements are subject to a
number of risks and uncertainties, many of which are beyond Kraft Foods' control, that could
cause Kraft Foods' actual results to differ materially from those indicated in any such forward-
looking statements. Such factors include, but are not limited to, the risk factors, as they may be
amended from time to time, set forth in Kraft Foods' filings with the US Securities and Exchange
Commission ("SEC"), including the registration statement on Form S-4, as amended from time to
time, filed by Kraft Foods in connection with the offer, Kraft Foods' most recently filed Annual
Report on Form 10-K and subsequent reports on Forms 10-Q and 8-K. Kraft Foods disclaims and
does not undertake any obligation to update or revise any forward-looking statement in this
announcement, except as required by applicable law or regulation.
Reference- www.transactioninfo.com/kraftfoods.
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