Ball Now in Cadbury’s Court, Says Verdict

October 1, 2009

Cadbury must set out a clear growth strategy to justify rejection of Kraft’s £10.2bn offer, according to Neil Saunders, consulting director of Verdict Research.

With Kraft revealing its hand in a very public way, the onus is now on Cadbury’s board to clearly demonstrate the strategy that will deliver growth and shareholder value over the next five years.

Neil Saunders: onus on Cadbury

In Verdict’s view, Kraft’s £10.2bn offer represents full and fair value for Cadbury, which is significantly above the current share price and, indeed, way above the value of the company since it spun off its drinks division last year.

It demonstrates Kraft’s commitment to the proposed deal; it also indicates the premium Kraft attaches to the Cadbury brands.

The logic of a deal is compelling as it would allow the combined group to compete more effectively, especially against Nestle.

The brand portfolios of the two groups complement each other perfectly with minimal overlap.

The ball is now firmly in the court of Cadbury’s board. It’s fine to reject the offer but they must demonstrate how they intend to grow the business over the next few years and give shareholders a very compelling alternative strategy.

While Verdict believes Cadbury will be able to grow sales over the next few years, the possibilities for continued cost cutting are marginal.

Cadbury’s has iconic brands in a segment of the market which is showing reasonable growth, so even with heightened competition they should be capable of improving revenues over the next few years. The difficulty is on the cost cutting side, Cadbury’s is already a lean business. It is doubtful whether they could extract the sort of synergistic savings Kraft has identified.

Verdict expects the proposed takeover to become increasingly fractious before it reaches a resolution.

Kraft will not want to walk away from what it sees as a good deal to secure future growth.

Cadbury’s, meanwhile, will be keen to preserve its independence. With this now being a very public matter, both sides will be keen to win over not only shareholders, but also the battle of public opinion.