Kraft (KFT) has made a $16.7 billion bid for Cadbury. The offer is about 30% above Cadbury’s current price. Not surprisingly, the offer is based on due diligence and financing, which may give Cadbury’s board a way out. It may give them leverage to get the offer up at the very least.
The proposed transaction shows that several things have occurred in the last month that will revive the comatose M&A markets.
Kraft (KFT) clearly thinks it will have access to capital to close the transaction. Its market cap is $41 billion so a $17 billion deal will probably not be easy to digest. Kraft has less than $2 billion on its balance sheet and $18 billion in long-term debt. It must believe big financial firms have developed a new appetite for funding transactions which are large and somewhat risky.
The other reason that M&A may be experiencing a resurrection is that the recession has kept earnings at many companies low and their stock prices down. Cadbury still trades well under where it did a year ago. Kraft must believe that its can take out redundant expenses in a buyout and that Cadbury’s fortunes will improve with the economy. Given the leverage the deal might involve, that is quite a risk.
Douglas A. McIntyre
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