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Kraft And Cadbury Deal Essay

1264 words - 6 pages

Special Report Dexia AM Risk Arbitrage Process
February 2010

A Focus on the Kraft / Cadbury deal

TRANSACTION HISTORY Kraft approach
September 7th - Kraft approached Cadbury Possible hostile offer at 745p per share: 300p cash + 0.2589 KFT Cadbury’s board rejected proposal November 9th - Put up or shut up deadline

Kraft Formal Offer
November 9th - Formal offer on the initial same terms December 14th - Cadbury published defense document January 2nd - Press rumor: Ferrero, Hersey or Private Equity fund could bid Speculation that Nestlé could be a white knight Potential counter bidders: Hershey January 8th – Kraft sells Pizza Business to Nestle for 3.2bn USD Nestlé said they won’t bid ...view middle of the document...

Merger Arbitrage spread = + 6% flat
Setup risk arbitrage spread at - 6% on September 07th, 2009 We put a high probability the deal to go trough: Huge strategic rational Market share gain New product (very attractive Gum sector – estimated 8% growth) New country (Emerging countries - Mexico and India) Increase Cadbury margin (Procurement, economy of scale) Synergies We put a very low probability of a competitive offer Nestlé wants to avoid a bidding war Hershey is to small to go alone Private Equity funds are busy restructuring their positions Ferrero is a to conservative and family own business 5% Probability: Kraft walk away Cadbury price 600p Low probability because it is a “one in life time opportunity” 55% Probability : Kraft hostile offer Cadbury 745p Cadbury’s management and shareholders won’t accept this price In term of multiple, 745p implied 10x Ev/Ebitda which is far below historical transactions and comparable

©Dexia Asset Management - Editorial Date: 02 Mar. 10 - See legal notice at the end of the document

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Special Report Dexia AM Risk Arbitrage Process
February 2010
40% Probability : Kraft friendly offer Cadbury 850p Kraft is highly motivated To be friendly the deal need a sweetening 850p in line with historical transaction Warren Buffet who holds 9% of Kraft shares won’t vote a huge capital increase Kraft will sweeten but with cash and as they want to keep their investment grade rating, they can’t pay more than 850p From January 19th – After final Offer Mix and match election: Kraft offered investors with the opportunity under the “Mix & Match Facility” to receive more cash or more shares payment. We choose to receive more shares, which enhanced the final return for the funds.

2. Opportunistic trading = +3% flat
Before November 9th - Put up or shut up deadline We bought Cadbury shares at 775-785p and sold above 800p because we knew that the maximum Bid price is around 840p-850p. Press articles and rumours generate volatility on Cadbury share price Rumours that Kraft could walk away or that Cadbury prefers a standalone solution gave us buying opportunities at 785p On the other side, market noises saying that Nestlé or a consortium could make an alternative offer generated a sell opportunity above 800p We think that the deal is very positive for Kraft shareholders mainly due to the high level of synergies and a limited dilution. Between November 9th and January 18th – Before revised offer Once we had a formal offer on the table (after November 9th), we knew that the downside was limited so we bought shares at 795p and sold some at 815p. Warren Buffet who holds 9% of Kraft shares won’t vote a huge capital increase. That statement created a trading opportunity. Cadbury shares...

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