Kraft Foods Business Vision Fm

8/2/2019 Kraft Foods Business Vision Fm

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MERGER

A merger involves the mutual decision of twocompanies to combine and become one entity; it canbe seen as a decision made by two "equals".

The combined business, through structural andoperational advantages secured by the merger-

1. can cut costs and increase profits,

2. boosting shareholder values for both groups of

shareholders. A typical merger, in other words, involves two

relatively equal companies, which combine to becomeone legal entity with the goal of producing a company

that is worth more than the sum of its parts.


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TAKE OVER

A takeover, or acquisition, on the other hand, is characterized by thepurchase of a smaller company by a much larger one.

This combination of "unequals" can produce the same benefits as a merger,but it does not necessarily have to be a mutual decision. A larger companycan initiate a hostile takeover of a smaller firm, which essentially amountsto buying the company in the face of resistance from the smaller company'smanagement.

Unlike in a merger, in an acquisition, the acquiring firm usually offers a cashprice per share to the target firm's shareholders or the acquiring firm's

share's to the shareholders of the target firm according to a specifiedconversion ratio. Either way, the purchasing company essentially financesthe purchase of the target company, buying it outright for its shareholders.An example of an acquisition would be how the Walt Disney Corporationbought Pixar Animation Studios in 2006. In this case, this takeover wasfriendly, as Pixar's shareholders all approved the decision to be acquired.


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TYPES OF MERGER1. Horizontal Mergers- A horizontal merger involves two firms operating

and competing in the same kind of business. The merger of JP Morgan andChase Manhattan is a horizontal merger.

2. Vertical Mergers- vertical mergers occur between firms in differentstages of production operation for example By directly merging withsuppliers, a company can decrease reliance and increase profitability. Anexample of a vertical merger is a car manufacturer purchasing a tirecompany.

3. Conglomerate Mergers- Conglomerate mergers involve firms engagedin unrelated types of business activity. There are three types of mergers.

Product Extension mergers

Geographic (Market) Extension mergers

Pure conglomerate mergers


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MOTIVES FOR MERGERS (Synergies)OPERATING Synergies include: Operating synergies can

affect margins, returns and growth, and through thesethe value of the firms involved in the merger oracquisition.

Economies of scale

Greater pricing power

Combination of different functional strengths

Higher growth in new or existing markets


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MOTIVES FOR MERGERS (Synergies)

Financial Synergies: With financial synergies, the

payoff can take the form of either higher cash flows

or a lower cost of capital (discount rate) or both.

A combination of a firm with excess cash, or cash

slack

Debt capacity

Tax benefits


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US group Kraft Foods, clinched a takeover deal forBritish confectioner Cadbury, after winning support

from shareholders representing 72 percent of the

maker of Dairy Milk chocolate

The news came after Cadbury's board agreed to

Kraft's improved cash-and-shares bid worth 11.9

billion pounds (19.0 billion dollars, 13.6 billion

euro's)

AN OVERVIEW


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Kraft had made an initial offer of 10.2 billion to thelargest confectionary giant in the UK, but was turneddown stating that the company was majorlyundervalued. The main motive behind the takeover byKraft was to become the largest confectionarycompany in the world which would result in a turnoverof around 50 billion per year. When themanagement turned down the offer, Kraft sent across apetition to the shareholders of Cadbury offering thema cash and shares deal of 300 pence along with a0.2586 share for every Cadbury share they sell. Thisvalued the share at 748 pence against the previous 568pence with a first hand profit of 30%. By 9th November,

a very hostile Kraft lowered its offer to 9.8 billionand did not imply any modifications to its previousdeal. However, this news backfired and led to a drop in2% in the share market.


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But after months of fiercely resisting any deal,

Cadbury finally agreed to an improved

takeover offer from Kraft Foods, worth about$19 billion.


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KRAFT FOODS BUSINESS VISION

BE THE LEADER

COSTOPTIMISATION

INCREASE THEPORTFOLIO

MIX

INCREASE ITSDISTRIBUTION

CHANNELS


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WHY ACQUIRING CADBURY?

1ST RANKWORLDWIDE

CONFECTIONER

50 BILLION US $IN TOTALREVENUE

625 M US $ /YEAR IN

SYNERGIES

1,2 BN US $COST IN 3

YEARS


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Reason why?


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THE SYNERGIES

ECONOMIES OFSCALE

KNOWLEDGESHARING

A

COMPLIMENTARYGLOBALPRESENCE


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FINANCIAL EVALUATION


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DEAL STRUCTURE

10 pencespecial

dividend =

0.1874new kraftshare +

500 pencecash +

1 cadburyshare =

850 pence


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Analysis


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WHAT HAPPENED?


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Alls fair in love and synergies

Because synergies benefit potentially both the acquirer and the target, there was always going tobe some argy-bargy over what constituted a fair allocation. Kraft had repeatedly stressed that it

would remain financially disciplined. Clearly one route to indiscipline would be to overpay forCadbury by getting its synergy numbers wrong and in so doing giving all the benefit, and more, tothe departing Cadbury shareholders.

Once achieved, synergies amount to extra profit. But achieving post-integration plans is ofcourse fraught with uncertainty, and putting an incremental EBITDA number on them is even moredifficult. Even armed with this number, the much higher riskiness of achieving the synergiesmeans that a significantly lower multiple is warranted for them than for the company as whole.

Kraft initially identified $625m of annual cost synergies; a number it subsequently raised to$675m, supported with Rule 19.1 letters from both Lazard and Ernst & Young. Given that even themost bullish of investment banks tend to take a deep breath before putting their opinions in blackand white, it is fair to assume that the underlying assumptions are reasonably conservative.

Allowing for the costs of implementation and applying a conservative multiple of ten (versus the11.5-ish for the company as a whole, discussed above) values the synergies at around 160p pershare (for more detail on this calculation click here for an interactive synergy calculator opens ina new window) . Add this to a standalone valuation of 700p per share discussed above and Krafts

eventual 850p bid is in the money (just). If your view on the standalone value is 675p though, thenKraft overpaid.

Of course if you take a braver view on cost synergies (JP Morgan research initially suggested afigure of up to $1,600m before revising this down to $1,000m) then 850p looks like much more ofa bargain. Also, although much harder to quantify, given their complementary geographical spreadand the ability to cross-sell each others brands, there is clearly huge scope for revenue synergies.(Kraft wouldnt be drawn beyond saying that these were significant.)
http://ratiofinancial.com/calculator/CadburySynergiesBlog.xlshttp://ratiofinancial.com/calculator/CadburySynergiesBlog.xlshttp://ratiofinancial.com/calculator/CadburySynergiesBlog.xls


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AGREEMENT TERMS

Cadbury shareholder offer: 500 pence cash and 0.1874new kraft share for each cadbury share.

Cadbury shareholders will get 10 pence per share byway of a special dividend.

Offer values cadbury at approximately 11.9 billionpounds.

Final offer does not require the approval of kraftshareholders.

Full acceptance will result in the issue of 265 millionnew kraft shares,representaing 15% of its enlargedshare capital.

Cadbury says considers offer fair and reasonable.


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Verdict our integration is progressing extremely well..We moved quickly

to name our leadership teams and im pleased that about a third ofour top 50 executives are from cadbury.

Weve

confirmed our

synergytargets and

the specific

initiatives that

will drivefuture margin

expansion and

accelerate our

growth.


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Okay, but who came out on top? Only time will tell if Kraft pulls off the integration of Cadbury. But given its

conservative assumptions, it would have to do a pretty poor job not to

realise $675m taking into account revenue synergies as well. At 7.7% ofCadburys sales they are less than the 8.3% average achieved in the foodsector.

So why did Cadburys chairman Roger Carr fold at 850p? Doubtlessweighing on his mind was his time as Chairman at Mitchells and Butlers in2006. The board held out unsuccessfully for six pounds in the face of a 575p

offer. Although the share price subsequently stormed above this, in lessthan two years it was back below 150p and since has barely reached 300p.

Essentially the Cadbury board were asking their shareholders to forgo somejam today in return for a bit more later. They also knew that with the pizzabusiness sale done and dusted and facing aborted transaction fees runninginto the hundreds of millions, Krafts Ms Rosenfeld badly needed a deal,whatever her rhetoric on discipline. At 717p the Cadbury boards positionwas justifiable. At 850p, and given the large number of hedge fund andother opportunistic shareholders on Cadburys register, Mr Carr swallowedhard and concluded that it no longer was.

Still for holders of paper worth 568p just five months previously, the nigh-

on 50% premium Kraft paid cant be considered too bad.


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ARPIT UPPAL

CHANDNI ARORA

DEEPIKA SHARMA

ESHA KUKREJA

HARDEEP SINGHHARSH BANSAL

Kraft Foods Business Vision Fm

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