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Should Cadbury Shareholders Take the Money and Run?

Jeremy Glaser

Jeremy Glaser: I'm Jeremy Glaser with Morningstar. Kraft's surprise bid for Cadbury caught many investors off-guard this holiday weekend. Here to discuss the transaction with me is Consumer Products Analyst, Erin Swanson. Erin, thanks for joining me.

Erin Swanson: No problem, Jeremy.

Glaser: Do you think that this move makes a lot of sense for Kraft?

Swanson: From a strategic perspective, I do believe that it makes a lot of sense from Kraft's perspective. The confectionery industry is a very attractive market with high growth and higher margins relative to other categories within the packaged food space. Further, private label penetration within the confectionery industry is minimal and this transaction would allow Kraft to further broaden its international reach.

Glaser: So Cadbury has more of an international market than Kraft's. Kraft's sales are primarily in the United States right now?

Swanson: Kraft's are about 50-50 right now.

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Glaser: So do you think that the $16 billion price tag that they have put out there right now, do you think that's a fair price for Cadbury?

Swanson: We believe that it is actually a premium to what we believe Cadbury is worth at this point in time. However, Cadbury seems less than interested for the current offer.

Glaser: So what do you think Kraft is going to do? Are they going to make this a hostile offer, are they going to raise their offer?

Swanson: There are a couple of things Kraft could do. For one, Kraft could sweeten its offer by raising the price. However, the other option, in our opinion, would be that Kraft could change the mix between cash and stock. Cadbury shareholders I don't think are very interested in gaining Kraft's stock and so if Kraft were to increase the portion of cash that they are paying for Cadbury, Cadbury shareholders maybe more interested in the deal.

Glaser: So now Cadbury has been talked about as an acquisition target for a long time, do you think there are other companies out there that now that Kraft has put their offer on the table, are going to come out of the woodwork and also look to get in on a piece of this action?

Swanson: Yeah, there are some other bidders that we believe could emerge for this highly valuable asset; for one, Nestle is definitely a possibility, other players could be Hershey or even Pepsi could emerge and compete with Kraft for Cadbury.

Glaser: So given all of the uncertainty around who the different bidders might be, what the final price, things like this, if you hold Cadbury shares right now, what is your advice?

Swanson: Cadbury's stock price is getting very close to our considere sell and so we believe shareholders are getting a lot of value for their ownership position right now and they may be best off just taking their current shares and selling them at this point.

Glaser: So it might not be worth it to hold on for who knows how long to see how the saga eventually plays out?

Swanson: Exactly.

Glaser: And what do you think about Kraft shareholders?

Swanson: Kraft shareholders at this point in time, we are definitely not suggesting that Kraft shareholders increase their ownership position, basically we are kind of at more of a hold.

Glaser: So you don't think that this transaction even if it did go through would be so transformative that Kraft would be worth a lot more or so destructive that it could be worth a lot less?

Swanson: It depends again what price Kraft ultimately ends up paying. If they do significantly sweeten the offer price that they are willing to pay, it could definitely be dilutive to our value of Kraft.

Glaser: So thinking of Kraft's financial position, do they have the flexibility to increase the offer or to make the offer a little bit sweeter without impairing current shareholders?

Swanson: Kraft operates with about 45% debt to capital, which is about average for a packaged food company. They have $1.7 billion of cash and they have funding available on their credit facility. So we do believe they maintain the financial flexibility at this point to close the deal.

Glaser: OK, great. Thanks so much for speaking with me today, Erin.

Swanson: No problem, Jeremy.

Glaser: I am Jeremy Glaser with Morningstar. Thanks for watching.