Takeover season marks an early thaw

The market thawed a little this week. T-Mobile stopped flirting and announced it had chosen a suitor in Orange. A day earlier, US food giant Kraft revealed its hand with a £10.2bn cash-and-shares bid for Cadbury.

Both sectors are ripe for consolidation so T-Mobile’s move came as no surprise. We’ve long been aware that the UK mobile phone market was no better equipped to service four big operators than other European markets contested by three.

The Kraft bid did startle though. Cadbury has been a target for many years, but ironically it is only recently that the UK confectioner has tidied up its portfolio, cut costs and embarked on a believable growth strategy.

The strategy at Kraft, which has never traded above its IPO price, looks less convincing. The idea of a “global powerhouse” in snacks and confectionery doesn’t inspire. If size were everything, Kraft, the second biggest food company in the world, would not have the strategic gaps that would be so perfectly filled by Cadbury’s premium brands. Meanwhile, Cadbury, while the smaller of the two by far, is no minnow. For a short time, in between demerging its US soft drinks division and rival Mars buying Wrigley last year, Cadbury was the world’s largest pure confectionery company. Since then it has acted wisely. Shareholder Legal & General opposed the bid immediately, pointing to Cadbury’s recent management initiatives that still “have further to run” in creating shareholder returns.

L&G may have been referring to the 2008 separation of the fizzy drinks business or indeed the careful management of the Trident chewing gum brand, a mini-express train in the fastest growing confectionery category. Or it might have been referring to Cadbury’s commitment to make all of its Dairy Milk bars from Fairtrade chocolate. With that initiative, Cadbury couldn’t be more in tune with consumers looking to spend money based on values as well as value.

Or L&G may have been thinking about Cadbury’s strong position in emerging markets. Compare such a nimble approach with a quote Kraft chairwoman Irene Rosenfeld gave to a US radio station earlier this year: “There is nothing more exciting to consumers than grilled cheese and a bowl of soup.” I don’t know about you but I’m not sure she really knows how I feel about things.

You don’t need to work in the City to understand the implications of the past few days. While Cadbury’s claim that Kraft’s bid “fundamentally undervalued” its business is true, it was also read in various quarters as a message that returning with a proper price would see a buyer succeed. Perhaps it is more hope than belief, but I can’t see debt-laden Kraft being able to afford an all-cash deal of the right magnitude to provide value for Cadbury’s shareholders.

Our Cadbury insider on page 5 believes a deal of a different sort is almost inevitable while Stuart Smith’s look at Nestle’s role in the outcome on page 12 is vital reading for those wanting to understand the context behind the drama.



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