US ARBITRAGE investors have bet that a white knight will not materialise following the unsolicited bid by Kraft Foods for British confectioner Cadbury, with some warning about too much optimism over a higher deal price.
Kraft unveiled its bid, currently valued at about £10 billion (€10.8 billion), earlier this month and was quickly rebuffed by Cadbury. Shares in the British company surged more than 40 per cent after Kraft’s offer and have settled above the implied value of the bid, currently around 730 pence in cash and stock.
Cadbury shares are trading at about 804 pence, about 10 per cent higher than the Kraft bid, and some analysts believe it could take an offer of up to 900 pence to swallow the chocolate maker.
But one arbitrage investor suggested that Cadbury’s stock was already “pricing in a lot of optimism”, and could limit profits if the company accepts a deal below investor expectations.
That investor said Kraft might attempt to “push the timeline out and convince the market that they are the only game in town. Then negotiate.” That would also allow arbitrageurs, who are more likely to be concerned with a short-term payday than a company’s long-term prospects, to snap up a bigger share of Cadbury.
Large Cadbury investors are already expressing concern that chief executive Todd Stitzer may overplay his hand in trying to secure a higher price.
Yesterday, Mr Stitzer clarified remarks made earlier this week that were construed as being more open to the deal after coming under scrutiny from Britain’s takeover panel, and also said the Kraft offer made no strategic sense.
Kraft investors say they don’t believe the company has much leeway to raise its bid.
Kraft chief executive Irene Rosenfeld “will have to go a little higher, but the question is, what’s my threshold of pain?” said one fund manager who owns more than 60,000 shares in Kraft.
“Maybe it is 10 or 20 per cent more. Any higher than that and I probably won’t be a shareholder any more.” More than 280 million of Cadbury’s shares have traded since the deal was announced on September 7th. While many of those trades likely involved the same shares changing hands several times, that volume accounts for roughly a fifth of the British company’s outstanding shares.
One arbitrageur said there was money to be made from the Kraft-Cadbury dance, but no major excitement as it plays out.
“This is lining up as a typical MA play: unsolicited bidder lobs a reasonable, but not yet full price. Target balks. Bidder will likely tweak the price or the mix of securities being paid enough to trigger a negotiation. Deal happens. Pretty cut and dry,” the arbitrage investor said. - (Reuters)
