Ever since Todd Stitzer, chief executive of Cadbury, demerged the group’s drinks business last year, he has done everything he can to become the City’s investor pin-up. He has followed the rule book, turning it into a focused company with international reach and an exposure to emerging markets.
Huge costs have been taken out over the past two years, including 7,500 redundancies. Stitzer has also avoided the elephant trap of overloading the balance sheet with debt.
The one thing he has failed to do during this journey is convince the City to put a higher stock market rating on his shares, to a level that would put it out of the reach of an opportunistic bidder. This is the single reason why the company found itself on the receiving end of a £10 billion bid from Kraft, America’s biggest food group, last week. Against its international peers, Cadbury had looked undervalued, so much so that it allowed Kraft to offer a 40% premium to the pre-bid closing price. And still analysts are saying it is cheap.
Stitzer could have achieved a higher rating by moving the firm’s domicile to America, a country that traditionally puts higher valuations on quoted companies and where the firm already has a big investor base. But he knows the deep Quaker roots that Cadbury has in the UK would rule this out.
This is now Stitzer’s chance to sell his story. He has to convince investors he can achieve his ambition of growing margins to 15% by 2011 and that, combined with bolt-on acquisitions, revenues can also be lifted to boost the share price. At the current bid price of 745p (although the price is lower when last week’s rise of sterling is taken into account) that is not a hard job. The market thinks the same way and Cadbury’s price closed the week at 775½p.
However, if Kraft starts to move its bid price towards 850p a share, then it will be down to Stitzer’s salesmanship and the appetite of investors. They know that if they reject an offer it would see Cadbury’s shares drift down to 600p and not recover for 18 months.
I had dinner with Stitzer on Thursday night. He believes he can do it and he has a road map to show the growth opportunities over the next five years. He is not interested in any short-term gimmicks to “goose” the share price.
Instead he believes in long-term value generation. He says one way of killing that value is for Kraft to start pushing its own products down Cadbury’s international pipeline, turning the company into an unwieldy food conglomerate, an argument Irene Rosenfeld, the combative, roller-blading chief executive of Kraft, rejects.
There is a price Cadbury will go for, but Kraft is not there yet. There are other cash-rich funds out there and Unilever and PepsiCo will be taking a look. Cadbury is now as much of a play on the emerging-market economies as it is on mature western markets. In India it is starting to sell slow-melting chocolate balls as fast as they can make them, and in Mexico and Brazil they are learning to chew as much gum as the Americans.
But don’t write off Kraft. Despite earlier doubts, US banks are falling over themselves to lend cash to finance the offer. Rosenfeld has a track record of investing through hard times. She wants Cadbury and has identified enough big synergies in processes, technology and global distribution to build a food powerhouse. She will not buy at any price, though. She has rebuilt Kraft over the past three years and has no intention of squandering those gains.
This is going to be a long game. For investors, the spotlight will focus on Cadbury’s value proposition measured against the value of Kraft shares — it is financing 60% of its bid by paper — and its cash. If Kraft raises its offer, the value of that paper currency will become increasingly important. Kraft and Cadbury will take this battle to their investors and that is where the final decision will ultimately rest.
No comments:
Post a Comment