Kraft's latest European foray could spur more deals

CHICAGO/NEW YORK (Reuters) - Kraft Foods Inc KFT.N is once again turning to Europe to try to boost sales and improve margins, hoping to convince Cadbury CBRY.L to accept a buyout that could start a new round of food industry consolidation.

A general view of the Kraft Foods Inc headquarters in Northfield, Illinois, February 10, 2009. REUTERS/John Gress

Kraft went public on Monday with a $16.7 billion bid after the British confectioner, known for its much-loved chocolate bars, rejected a cash and stock bid that valued Cadbury at 745 pence a share.

For Kraft, the deal is seen as a natural extension of a strategy to push into more overseas growth areas and also products like chocolate that offer higher margins than other parts of a portfolio that includes items like cheese and frozen pizza.

“This is just another step in that direction,” Morningstar analyst Erin Swanson said, noting that Kraft has been revamping its portfolio. The company has exited businesses where it was not a leading player or where prospects were limited.

At the same time it has made acquisitions like the 2007 purchase of Danone's DANO.PA cereal and biscuits business, a $7.82 billion deal that expanded is footprint in Europe and other parts of the world with products like Lu cookies.

Swanson said the 2007 acquisition seems to have progressed well and that Kraft’s overhaul of its business has helped set the stage for the offer for Cadbury.

“It seems like they are definitely leaner and more prepared to take something like this on,” Swanson said.


Another round of consolidation in the food industry has long been seen as likely as companies struggle to increase sales in a mature sector that has also been hit first, by rising commodity costs and then a recession that has sent consumers looking for less expensive products.

“Consolidation in the food sector has long been anticipated,” said a deal advisor who is not involved in the proposed deal and asked not to be named. “Given the drop in water revenues, Nestle and Danone are thought to be looking at acquisitions to spur revenue growth, the person said. More deals are likely to happen in the sector over the next 9 to 18 months,” the person said.

Kraft said that combining with Cadbury would create a company with leading market positions in developing markets like India, Mexico, Brazil China and Russia.

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The company also said it could cut at least $625 million in costs annually, while also building up revenue by combining distribution and new product development.

In a videotaped statement, Kraft CEO Irene Rosenfeld also said of Cadbury: “I believe that in the current global economy, the growth prospects are constrained.”


A source familiar with the situation said that Kraft has already had some discussions about financing the cash component of the deal, which the person didn’t believe would be a problem. A benefit in having the proposal made public is that it can talk to all its banking sources regarding financing, that source said.

That source said that timing of the proposal was primarily driven by Kraft’s revitalization plan and by the improvement in the debt markets, particularly for investment grade financing. The move itself has been considered for a long time.

But others have also considered bids for Cadbury, too.

Some analysts said that Hershey Co HSY.N and Nestle AG NESN.VX could make a joint offer for Cadbury and then split the business.

The Wall Street Journal reported on Monday that Hershey, which has had discussions with Cadbury in the past, would not likely stand by and let Kraft or another rival swallow up Cadbury, citing a person familiar with Hershey’s thinking.

Hershey spokesman Kirk Saville declined to comment on Hershey’s potential interest for Cadbury, citing company policy to not talk publicly about merger and acquisition issues.

Nestle CEO Paul Bulcke declined to comment directly but said the company had no major acquisitions planned though it was always open to opportunities.

Cadbury and Hershey have both been seen by analysts as being vulnerable since Mars Inc, the maker of M&Ms, Snickers and other candies, bought chewing gum maker Wm Wrigley Jr Co last year for $23 billion.

Investor Warren Buffett's Berkshire Hathaway Inc BRKa.N, which owns about 9.4 percent of Kraft's shares, helped fund the Mars-Wrigley deal.

But the trust that owns a controlling stake in the company has said repeatedly it is legally obligated to maintain majority control of Hershey, making it less likely that Hershey would be sold.

Reporting by Brad Dorfman and Megan Davies; Editing by Richard Chang