Kraft’s Hostile Bid for Cadbury

On Monday, Kraft Foods Inc. (NYSE: KFT) made an unsolicited $16.7 billion bid for British chocolate maker Cadbury PLC (NYSE: CBY). Cadbury stock jumped 41 percent on the news. The fact that Cadbury shares are now trading higher than Kraft’s offer indicates that the market anticipates that Kraft will increase its bid (though Kraft denies that it intends to do so) or that another company such as Nestle or Hershey will make a competing bid. It’s also possible that private equity or hedge funds will get involved in the action.

The situation is reminiscent of Hilton’s hostile bid for ITT Corp. in 1997. In that case, Hilton made an unsolicited offer of $6.5 billion in cash and stock for ITT, a company that owned Sheraton Hotels, among other assets. The $55 per share offer represented a 29% premium over the closing share price of ITT. On the news, ITT stock jumped to $58.50, indicating, as in the Kraft-Cadbury bid, that the market anticipated a sweeter bid or another company, such as Marriot, to enter the bidding war. One difference, however, is that in the case of ITT, many analysts indicated that Hilton’s was a low-ball offer and Hilton itself had said that it was willing to negotiate a better price. Kraft on the other hand doesn’t appear willing to negotiate a better offer, though of course this could simply be hard-ball negotiating tactics. Hilton ultimately increased its bid to $70 per share and won a federal court injunction against ITT as the company sought to employ defensive takeover strategies. Yet in the end, ITT was sold to the almost unknown Starwood Lodging for $82 per share (Starwood was able to pay such a high price thanks in part to its REIT tax-exempt status).

The question on everyone’s mind is whether Kraft will increase its bid or whether a so-called White Knight will enter the scene to save Cadbury from a Kraft takeover. Stay tuned as the action unfolds on SharePower - this promises to be an interesting battle for control of Cadbury.