Cadbury

Deal done at 850p (500p in cash and 340p in shares+10p special dividend), bang in line with our initial estimates (cf our September 7th comment).

850p implies 13xEV/EBITDA, which is below the 14-15x range seen in previous deals, but still fair considering a tougher trading environment, potentially stronger competitors (cf merger Mars-Wrigley) and a volatile raw material context.

Moreover, combining cash and shares is good news for Cadbury shareholders at a time when Kraft shares are trading at 12% discount to the US food sector.

Cadbury

Stock price: p795
Conclusion: Hershey, the only one left for a counter-bid. Unlikely to exceed Kraft’s final offer, expected to be within p790-p860 range on our estimates. Higher return elsewhere.

According to the FT, a formal offer could be made before the January 23 deadline.
Hershey would have to offer a higher price than Kraft’s expected revised offer.
According to the FT, private equity investors should help to finance the deal. Assuming $1.6bn from the issuance of class B stocks, coupled with the raising of $8bn debt in Hershey-Cadbury combined balance sheet, we estimate the gap to be bridged at $8-9bn.

As a result, we feel that the likelihood of offering more than Kraft is low. It is all the more unprobable as we expect Kraft to extract higher synergies than Hershey.

Cadbury

Stock price: p778

Conclusion: Nestle’s announcement and Buffet’s warning lead us to reiterate that Cadbury looks fully priced.

Nestle declared that it does not intend to make, or participate in a formal offer for Cadbury. Berkshire, which has a 9% stake in Kraft announced that it has voted No to a proposal to authorise the issue of up to 370m Kraft shares to fund its hostile bid for Cadbury.

Nestle’s statement confirms our view that Nestle is not ready to make a multi billion deal for Cadbury or Hershey (cf our comment Sept 7). Nestle’s declaration removes a key potential source of counterbid for Cadbury.
We estimated in a previous comment (Nov 23) that a potential Hershey bid or Hershey-Ferrero alliance was unlikely to exceed Kraft’s final offer.

Notwithstanding Berkshire’s statement, we continue to expect Kraft to slightly improve its offer towards the low end of our p790-p860 range estimate. As a result, we feel that the stock looks fully priced.

Cadbury

Stock Price : p794
Conclusion: We feel that the new long term targets (+5-7% sales pa, 16-18% margin by 2013) should be difficult to achieve. We reiterate our view that the stock looks fully priced.

Organic revenue growth of 5-7% per annum, compares with 6.3% achieved between 2004 and 2008, which looks feasible. However, mix and pricing accounted for more than two thirds of that growth in the recent period. Going forward, Cadbury will have to rely more on volume at a time when consumer are more reluctant to pay a premium for staples. As a result, we think that the high end of the range looks very optimistic in the absence of significant pricing action. We are also surprised to see Cadbury raising its sales growth target while other food companies confirm lackluster demand in developed markets.

We feel even less convinced on the margin front. 16-18% margins by 2013, implies more than 90bp gain pa, compared to 40bp pa achieved between 2004 and 2008. Hershey, Nestle or Lindt margins are very far from that target. COGS is higher in chocolate and does not leave much room for manoeuvre. In addition, it will take time to enhance margins in Continental Europe (20% of sales) where Cadbury lacks scale and leverage.

We continue to expect Kraft to slightly improve its offer but think investors should not refuse an offer between p790-p860 per share.

Cadbury

Stock price: p800.5

Conclusion: We think a potential Hershey bid or a Hershey-Ferrero alliance might prompt Kraft to increase its offer but it is unlikely to exceed p860 per share or $20bn ( the top end of our estimated valuation range).

Hershey and Ferrero confirmed that they are reviewing their options regarding Cadbury.

-We envisaged in a previous comment (Sept 7th) that Hershey might accept to be diluted to 51% and join in a JV in order to get a better access to international markets.
According to the FT, Hershey would pursue a $17bn bid for Cadbury topping Kraft’s $16.2bn offer.
Assuming 4x leverage and the issuance of class B stocks, we estimate that Hershey ($5bn sales) could fund $4.5bn. More funding would require the issuance of non voting shares which might be more difficult to get and the contribution of external investors.

-As to Ferrero ($9bn sales) we estimate the borrowing capacity at $6-$7bn based on zero existing debt and EBITDA margin of 19%. Our assumptions remain to be confirmed as we do not have access to financial statements. According to the FT, net debt was $3bn, which would reduce the borrowing capacity to $4bn.

-Last Cadbury balance sheet could handle $4-$5bn debt.

Consequently, we estimate total funding between $14bn and $17bn, while Kraft could afford a revised offer estimated close to $20bn.
Matching a revised offer from Kraft would probably require the financial backing of a private equity firm.
In addition, the amount of synergies should be much lower than Kraft’s estimates, given the geographic exposure of both groups.
As a result, we feel that the likelihood of offering more than 860p is low.

Based on the current stock price and assuming that Kraft would raise its offer to 860p, Cadbury offers less than 10% upside potential. Based on the low end of our range (790p), the stock looks fully priced.

Cadbury

Stock price: p760
Conclusion: We think that Kraft could slightly improve its offer but we reiterate our view that Cadbury will find it hard to refuse an offer around p790-860.

Kraft confirmed the terms of its offer: 300p in cash and 0,2589 new Kraft shares which values Cadbury at £9.8bn (717p per share). Cadbury just rejected a “derisory offer”.

Based on our revised 2009 estimates following Q3 update, Kraft’s offer values Cadbury 11xEBITDA, which is below the 14-15x range seen in previous deals.
We feel that such multiples are not valid anymore for two reasons: the environment has become much tougher in the consumer field and, as expected (cf our previous comments), Kraft seems to be the only suitor. In addition, the offer assumes synergies of $625m (6% of Cadbury sales), which seem realistic and in line with previous MA deals in the consumer sector.
As result, we feel that a valuation based on a 12-13x range (p790-860 par share) should be a good deal for Cadbury shareholders.

Cadbury

Stock price: p797
Conclusion: unchanged since September 7th, little upside left.

Q3 sales up 7% like for like, underlying EBIT margin up 180bp. Guidance upgraded to revenue growth ” around the middle of 4-6% range” and EBIT margin up at least 135bp.

Trading update is good news but we doubt that +10% price/mix impact is sustainable in today’s environment. In addition, margins benefited from lower marketing costs (down 80 bp of sales) which might rise again next year.

Raising guidance at a time when Kraft is expected to make an offer is not a real surprise.. Nevertheless, our EPS upgrade (+4%) does not change our investment thesis.

We reiterate what we said in our recent comment (cf September 7th).
-Kraft might be the only suitor which should not help Cadbury management.
-We believe that the offer price could be raised to around 850p, still generous considering the tougher economic environment.
-Management will find it difficult to refuse such an offer.

Cadbury

Stock Price: 790p

Kraft’s Bid ? any upside left ?

We see two reasons why Kraft is suiting Cadbury , one is its commitment to increase its exposure to emerging markets, the second is to create operational leverage in Western Europe by combining its chocolate portfolio with its acquired European cookies business.

We feel that Kraft might be the only probable suitor.
-Nestle ? Although premium chocolate could fit with health, nu
trition and wellnesss, this is not what Cadbury is about. In addition, Nestle’s CFO has also said in the past that Nestle is not interested in gum. As a result, we are not convinced that Nestle is ready to make a multi billion bid for Cadbury or Hershey. Nestle might be interested in smaller players like Lindt or Ferrero or in joining together with a partner like Hershey in confectionery.
-Hershey ? Hershey trust does not seem to be prepared to lose its controlling interest in the company. They may accept to be diluted to 51% and join in a JV in order to get a better access to international markets.

At what price ? 745p implies 31% premium and almost 22x P/E and 12x EBITDA based on 2009 estimates. Kraft believes it can generate £380m synergies, which would represent 6% of Cadbury sales, such a ratio looks in line with previous MA deals in the consumer sector. We think that the offer price could be increased to around 850p (13.5xEBITDA), which is below the 14-15x range seen in previous deals, but still generous considering a tougher environment in the consumer field. We tought the stock was fully valued on a standalone basis at 568p. Consequently, Cadbury management will find it difficult to justify to stick to a standalone strategy and refuse the offer.

Cadbury

Stock Price: 587p
Conclusion: Stock looks fully priced.

H1 sales up 4% like for like, up 13% reported to £2.8bn; proforma EPS up 12% like for like and up 24% reported. Management expects revenue growth around the lower end of 4-6% goal range, with stronger margin improvement between 80-100bp (constant currency).

At first sight, H1 numbers look great: sales up 4%, suggesting +6% in Q2; margins up 145bps in constant currency and 180bps reported.

However, we remain cautious about the results for various reasons:
-Top line growth was purely driven by pricing (+6%) while volumes were down 2%. Adjusting for destocking and SKU reduction , volumes remained flat in H1.
-Cadbury performed extremely well in chocolate, notably in the UK and in India, but revenue growth visibility looks poor in gum. Cadbury has lost 80bp share in the last 12 months in the US, where competition should further increase as a result of the recent consolidation in the sector (Mars/Wrigley). In Europe, Cadbury’s share is up, but markets are dramatically down by 12-15%.
-As to margins, second half should be more difficult with increased A&P spending (down 90bps in H1) and lower SG&A benefits. As result we forecast +100bps for the full year on a reported basis versus 180bps in H1.
-In addition, restructuring costs will once again impact earnings and cash flow this year by around £220m (almost 4% of sales). Management announced that overall investment in the Vision Into Action plan is now expected to be around £550m against £450m previously forecasted, with no additional benefits…
-Financial costs were higher than expected due to negative free cash flow of £220m compared with £109m in the first half of 2008. Free cash flow should remain negative for the full year, impacted by restructuring charges.

Cadbury trades at 17.1x and 14.8x P/E based on our 2009 and 2010 estimates vs 14.6x and 13.5x for the European food sector. The margin recovery story appears to be fully valued. We estimate the valuation range between 540-570p.

Cadbury

Stock Price: p524
Conclusion: We continue to believe that the stock is fully priced at 15x earnings and we see a trading range between p500-550.

Trading update: Slight improvement in April-May. Management confirmed guidance for the year of revenue growth around the lower end of 4-6% and good progress in margins.

Despite some improvement in April and May, we still think that revenue growth should be closer to 3% than the low end of 4-6%. Management highlighted that Europe remained “very challenging” which will hold back growth this year given the size of the business (20% of sales). North America (22% of sales) should also post below average growth, notably in the gum category. The continuing expansion in emerging markets is good news but Cadbury has still a relatively small exposure to these markets, only 22% of sales.
In addition, the strenghening of the sterling leads us to cut our reported sales forecast by 2-3%. Based on current spot rates, forex impact could turn negative next year.
Nothing new on the margin front. We think EBIT margin could gain 90pb to 12.7%, helped by SG&A savings. Deflation in marketing expenses should also help Cadbury to meet guidance this year, which might not be sustainable in the long run.

Cadbury looks expensive vs peers (15xP/E vs 13x sector P/E) due to superior EPS growth expectations. We do not see upside based on these levels.