CASE STUDY ANALYSIS

Corporate Finance - Case Study Analysis



Corporate Finance - Case Study Analysis

Introduction

Kraft Foods made a £10.2bn ($16.7bn) bid for UK Confectionery firm Cadbury Plc, in a sign that large-scale Merger and Acquisition activity in the food and beverage industry may be picking up again after the battering of 2008 (Kraft Foods, 2011). Although Cadbury rejected the offer, Kraft has announced that it will pursue the acquisition, leading to a surge in Cadbury shares and potentially triggering competing offers from other leading global Confectionery firms such as Nestle and Hershey, which will force Kraft to increase its bid and may result in an eventual sale of up to $21bn, according to analysts. However, Cadbury is an ideal fit for Kraft, whose Confectionery business overlaps with Cadbury in 80% of international markets.

Motives for Takeover

Acquisition involving food and beverage companies have faced significant challenges between 2007-2008 due to the impact of the global recession. While activity has been affected, the industry has not faced the same decline as other sectors, with areas such as beverages and confectionery still demonstrating a strong performance. Weaker sales and rising costs combined with changing consumer trends have presented the key challenges to the industry. While the economic environment remains tough, external factors such as branding and market positioning grow in importance (Sudarsanam, 2010, 90). While overall activity is declining, there is a trend towards consolidation and strategic alliance as stronger companies take over weaker competitors and vulnerable firms band together. Smaller strategic buyers paying in cash are also entering the market as the large private equity firms bow out to focus on their own instabilities.

Key motivating factor for Kraft Foods acquisition of Cadbury was to expand Kraft's global presence and tap the emerging markets. This acquisition would also lead to integrate world's famous brands such as Kraft's Oreo cookies, Velveeta cheese and Cadbury's chocolate bars under one roof. The acquisition was expected to help both the companies to compete effectively against the rivals. “Renowned industry experts also reason that a deal between Kraft and Cadbury would create a global food giant with about $50 billion in annual revenues, and would boost Kraft's growth prospects by giving it access to new brands, especially in the attractive confectioneries segment” (Cadbury, 2010, 124).

Kraft Foods - Cadbury acquisition process had started from August 2009. Before the final acceptance of Cadbury, Kraft Foods had repeatedly approached the UK chocolate firm both formally and informally. The initial offers were rejected and Kraft Foods was pressurized to increase their offer value. Moreover, Cadbury's performance was high which had made the acquisition process tougher for Kraft Foods. In early 2010, the world's largest food company Nestle had acquired the pizza business of its rival Kraft Foods for $3.7 billion. The funds from this deal had helped Kraft Foods to increase the offer of Cadbury and thereby acquired the company (Cadbury, 2011).

The Cadbury deal would turn Kraft Foods to a global powerhouse and the combined company was expected to earn revenue of ...