Kraft's interest in acquiring the British confectioner Cadbury is complicated by the combined attentions of Ferrero and Hershey

Published on Saturday 21 November 2009 14:16

PREVIOUSLY confident that she had a clear run in her ambition to take over chocolate giant Cadbury, Irene Rosenfeld, chief executive of US firm Kraft now faces a rockier road as she attempts to scale the summits of global confectionery.

The deal mix has changed substantially with the addition of Italy's Ferrero and Hershey of the US, both of whom confirmed last week they were considering a counter-strike for the British maker of iconic sweets, such as Dairy Milk and Cadbury Crme Egg. Although neither the Italian nor the American firm has confirmed they are working together, multiple unnamed sources from the US and Europe have been quoted as saying that the two are discussing a joint proposal to rival Kraft's hostile advance. But speculation is mounting that Hershey will launch a solo bid of at least $17 billion (10bn) to outdo Kraft.

Cadbury's chief executive Todd Stitzer (pictured above), has firmly rebuffed Kraft's cash-and-shares offer, which currently values its brands and operations at about 9.9bn, or 723 pence a share. The worth of Kraft's bid has been eroded from some 10.2bn on 7 September – the date Rosenfeld first went public with the offer – as the company's share price has slipped and the dollar has lost ground against sterling and other currencies.

Having the clout that comes with being the second-largest food group in the world, Kraft is still seen by many as the front-runner in the race to capture Cadbury. Analysts note that family-owned Ferrero and Hershey, which is controlled by a charitable trust, face significant challenges in putting together any offer. The structure of both companies casts doubts over their ability to put together a successful joint bid, and also raises questions as to how they would fund such a move.

Talks between the two have been described as a "developing story" with details still under discussion. Potential scenarios mentioned include an outright bid for Cadbury, a deal to operate the British confectionery firm as a joint venture, and the possibility of Ferrero and Hershey taking a stake in Cadbury that would effectively shut the door on Kraft.

"Obviously, this brings a total new spin to the transaction," says Jacob Schmidt, chief executive of Schmidt Research Partners in London. "Whether they will be successful – well, Hershey is obviously a smaller company, but with Ferrero they are about equal to Kraft.

"I am not quite sure they will be more successful than Kraft, but if nothing else, this should at least force Kraft to increase their offer."

Schmidt and other analysts say there is also the possibility that other interested parties will come to the fore as events progress. Kraft has until 7 December to publish its official offer document for Cadbury, which will then trigger the 60-day bid timetable dictated by UK takeover rules. This would give the Ferrero-Hershey combine, and any other suitors, until early February to come up with a rival offer.

With well-known brands, access to emerging markets and improving financial results under Stitzer, Cadbury's allure may tempt private investors as well as trade buyers. For the moment, the British confectioner maintains that it is not up for sale, but it would "give proper consideration to any serious offer that delivers full value for the company".

American-born Stitzer is a lawyer by training, but in the wake of joining Cadbury in 1983, both he and his wife became naturalised British citizens. The 57-year-old was a champion tennis player during his university days at Springfield College and then Harvard, and though he was good enough to go pro, Stitzer says his father persuaded him to pursue a career outside the sporting arena. From assistant general counsel, he worked his way up the executive ladder at Cadbury before being named chief executive in 2003. Though known for lapses into management-speak, he is credited with Cadbury's improving financial performance, which most recently included a 7per cent rise in revenues during the three months to 30 September.

Part of that success has come from double-digit sales growth in emerging markets such as the Middle East, Africa, South America and Asia. In the US and the UK, Cadbury's Trident has also been successful at cashing in on the fast-growing gum segment of the snack market. Stitzer oversaw the purchase of US gum manufacturer Adams and its Trident brand, which is ranked among Cadbury's "crown jewels" and is likely among those assets most coveted by Hershey.

Known throughout the country as Chocolatetown USA, Hershey, Pennsylvania is the historic home of America's premier chocolate maker. However, there has been a bitter tinge at "the sweetest place on Earth" in recent years as Hershey has been losing market share to Mars, now part of the Mars-Wrigley group that last year unseated Cadbury as the world's largest confectionery maker.

Hershey chief executive David West took over the post in December 2007 amid the disarray following the resignation of predecessor Richard Lenny, whose surprise announcement of an early retirement marked a high point in tensions between the company and the charitable trust that owns 78 per cent of its shares.

Founded in 1909 when Milton Hershey left his fortune to the establishment and ongoing operation of a residential school for underprivileged children, the Hershey Trust relies upon the dividends it receives from the chocolate company to fund its charitable work. It instigated a boardroom clear-out prior to Lenny's departure in response to the company's declining share price, but critics claim the trust's "dividends-first" policy is to blame for Hershey corporation falling behind in product innovation and the development of overseas markets.

In addition to getting its hands on Trident, which is taking share from Wrigley in the US gum market, Hershey would also benefit from Cadbury's access to fast-growing emerging markets. The companies have flirted with a tie-up for years, but Hershey's ownership structure has thwarted any union, as taking on the larger Cadbury would almost certainly eradicate the Hershey Trust's controlling interest.

There are similar difficulties in any potential link-up with Ferrero. However, Erin Swanson, consumer products analysts with Morningstar in Chicago, says it would be possible for the two to successfully divide up Cadbury's operations, or even run the business as a stand-alone joint venture.

Nearly two-thirds of sales by Ferrero, whose products include Nutella, Ferrero Rocher, Kinder Surprise and Tic-Tacs, are made in Germany, Italy and France. These are countries where Cadbury's chocolate presence is weak, so it could be that the Italian firm would take on the European business and leave other international operations for Hershey.

However, without access to public markets, privately-owned Ferrero will have to find other sources to fund any move.

Swanson at Morningstar says it "remains to be seen" whether the Italians can successfully link up with Hershey. Like others, she is not discounting the possibility that further bidders could enter the fray, though Swiss-based Nestl – the world's largest food company – ranks among the least likely candidates.

Though Nestl has not completely ruled itself out, chief executive Paul Bulcke emphasised earlier this year that his company currently has only a modest budget for acquisitions. Taking on Cadbury would also raise competition concerns in the UK confectionery market at a time when Nestl is more focused on its "health and wellness" portfolio.

"It seems more likely that Nestl will choose to sit this one out this time," Swanson says.

Meanwhile, it is almost universally expected that Kraft will ultimately have to raise its offer for Cadbury. Analysts say shareholders will be looking for at least 800p, and possibly up to 850p, from the maker of Toblerone, Oreos, Dairylea and Philadelphia Cheese.

Analyst Graham Jones at Panmure Gordon says there is scope for Cadbury to maintain its independence, given its improving financial performance. However, if Kraft succeeds under Rosenfeld's ambitious leadership, then dramatic changes are almost certainly in store for the British chocolatier's 45,000 employees.

"Kraft is trying to play a fairly clever political game when its comes to operations in the UK," Jones says, referring to statements from the US firm that it could reverse Cadbury's plans to close its factory in Keynsham, near Bristol, with the loss of 500 jobs.

"Ultimately, Kraft is touting $625m of cost savings from this deal, so no matter how you look at it, there will be job losses."