By Andrew Cleary and Jacqueline Simmons
Dec. 2 (Bloomberg) -- Kraft Foods Inc., the U.S. food maker attempting a hostile takeover of Cadbury Plc, is expected to argue its cash and stock offer has a potential value of about 800 pence a share, two people familiar with the situation said.
Kraft may tell Cadbury investors its bid will be worth about 12 percent more than the current 715 pence value when its shares return to its historical average value, said the people, who declined to be identified because the plan is confidential. The 800 pence figure is based on Kraft’s five-year average share price to earnings ratio and gives the offer a value of 11 billion pounds ($18.3 billion).
The Northfield, Illinois-based company, which has said it won’t overpay for the Dairy Milk chocolate maker, wants to persuade investors that the value of the Kraft stock they get will be worth more in time as the shares recover from a March record low. Warren Buffett, Kraft’s largest shareholder, has said the stock is “worth more money that it’s selling for.”
“The stock is undervalued on a fundamental basis,” Chris Growe, an analyst at Stifel Nicolaus & Co. in St. Louis, said in an interview. “There is an important underlying growth story and a much improved margin structure,” at Kraft, added Growe, who has a “hold” rating on the shares.
Kraft may outline this argument in offer documents due by Dec. 7, the people said.
“I won’t be able to speculate on something that we’ve yet to see,” Mike Mitchell, a Kraft spokesman, said today in an e-mail. “We will certainly be communicating to Cadbury shareholders through our offer documents.”
Kraft’s average trailing price-to-earnings ratio over the last five years is 18.3 times, according to monthly data compiled by Bloomberg. The company’s expected price- to-earnings ratio is 13.6 times for the year-end, below the 16.2 times average of companies in the Dow Jones Industrial Average index and the 17.5 times average of the Standard & Poor’s 500 index.
Kraft fell to a record of $21 in March as the S&P fell to lows that month after the recession worsened and consumers cut back on household spending.
Trevor Datson, a spokesman for Cadbury, declined to comment on whether the company’s board will consider the potential future value of Kraft’s shares. Kraft’s bid for Cadbury offers 300 pence and 0.2589 Kraft shares for each Cadbury share.
-- With assistance from Duane Stanford in Atlanta. Editors: Celeste Perri, Cesca Antonelli
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