Thursday, November 19, 2009

Kraft/Cadbury Update

Unlike most bloggers, when I follow a topic, I tend to do updates under the original article, rather than do a new one. This is because (1) I think this is the more logical way to do it and (2) I do not need to "drive traffic" by posting drivel and other "click bait." Please look here to visualize the correlation between posting frequency and traffic. The correlation is .86 in this study. ZeroHedge is blowing everybody out of the water both in traffic and daily posts, though I think that Clusterstock is up there too but it is not in the study. Both Ivandjiiski and Blodget have grown quickly by using multiple contributors over the last year, with Clusterstock becoming a quick-hit, Business Week-type, while ZeroHedge is deeper and substantially more paranoid. I read both on Reader, but I find myself spending more time digesting the ZH stuff. Blodget has journalists writing, while Ivandjiiski is much more plugged in the relevant circles. If I had to guess, one or both will be bought by an "old" news co within 1-2 years.

Back on track, KFT/CBY is something that I followed via updates here. A few things have happened since the last update, so it will be nice to have a recap in a new post.

(1) Kraft has gone hostile without raising the offer.
The original offer is now lower as KFT's stock dropped immediately post-announcement and has stayed in the $26-$27 range.
CBY calls the offer "derisory": gotta love the English sense of humor. Where was CBY's stock before the offer, pals?
I have to admit that I am pleasantly surprised by Kraft's stance in this case. Good for them, as this is proper negotiations techniques on display. I, as well as the market, was expecting an increase prior to going hostile, instead KFT is holding firm, like a Milka Zartherb chocolate after a night in the freezer.

(2) Yesterday, CBY had a huge spike, and fell, but stopped at a higher level, when the word got out that HSY and Ferrero might do a joint bid. HSY confirmed talks but no imminent offer. Exactly how that would work out, I do not know, possibly some sort of a split across the ocean.

In any event, it is a dangerous situation to be in. The only bid right now is KFT. A new bid may come above KFT but below the current price. KFT signaled during the last call that they would be disciplined (telegraphs "no bidding wars" to potential entrants). And, yet, CBY traded even higher. The potential for getting creamed in this situation is dangerously high. Do not attempt to do this at home. An arb would be short KFT and long CBY, and if KFT drops out, their shares will likely move up, CBY will move down, which is the exact opposite of what the arbitrageurs want.

(3) There is a good writeup on Kraft's credit woes over at Research Recap. Moody's does not like that KFT is once again looking to borrow before paying down the debt they took on for the Danone biscuit acquisition (yes, my friends, Le Petit Ecolier has now joined Miracle Whip at Kraft). There is also an interesting wrinkle with the COC provisions in CBY's current bonds. So, I think when it is all said and done, the case study would be interesting.

Research Recap today has good links from several sources with analyst opinions. Basically, KFT is still the front runner, Nestle does not seem to care, HSY's weird structure is once again coming in the way of a deal if equity is required.

Update 1 11/21/2009: Bloomberg is reporting that the Hershey trust is pushing for a HSY-only bid. Note that they do not have the cash for it: they are looking at $10 bn in cash, $2 bn in new shares and $X bn (sounds like $5 bn) from a partner. They mention PE, looking at their advisers, Buffett might also chip in, as he did in the Mars-Wrigley deal. What's becoming clear is that there will likely be a second bid, probably not much higher than KFT's, and it will come from a coalition of some sorts: HSY-Ferrero-PE-Buffett.

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