Nestle may join the battle for Cadbury but likely to face anti-trust hurdles

PARIS/NEW YORK/ATLANTA: Nestle is weighing options including a possible bid for Cadbury that would challenge Kraft Foods’ offer and a potential move by Hershey Co, according to two people with knowledge of the matter.

Nestle is reviewing its options with bankers and may decide against a bid, said the people, who asked not to be identified because the talks are private. Hershey and Ferrero said in statements last week that they were also evaluating options.

Ferrero, the maker of Nutella, is unlikely to proceed with an offer, said three people briefed on the situation.

Kraft’s unsolicited $17-billion bid for Cadbury would create the largest maker of candy, threatening Nestle’s and Hershey’s market positions. Any bid by Nestle or Hershey may be countered with a higher offer from Kraft, which has never said its current cash-and-stock proposal is final.

“We’re not surprised there are rival bidders considering an offer given the attractiveness of Cadbury’s portfolio,” Erin Swanson, an analyst at Morningstar in Chicago, said in a telephone interview on Saturday. “Nestle hasn’t seemed interested in Cadbury, but from a defensive perspective, they could consider it and anything could happen.”

Kraft’s bid values Cadbury at 726 pence a share, based on November 20 closing stock prices. The London-based maker of Creme Eggs and Trident gum, which closed at 801 pence, has traded above the bid price since the offer was made. Northfield, Illinois-based Kraft, the maker of Oreo cookies and processed cheese, rose 20 cents to $27.17 on November 20 on the New York Stock Exchange.

Hershey, based in the Pennsylvania town of the same name, added 4 cents to $37.18. It has a market value of $8.47 billion, compared with Kraft’s $40.1 billion.

“We’re the only offer on the table, and we’re confident we’re the best, most logical partner for Cadbury,” Mike Mitchell, a Kraft spokesman, said on Saturday by e-mail.

Spokesmen for Hershey and Vevey, Switzerland-based Nestle declined to comment. A representative from Cadbury also declined to comment. Hershey’s controlling trust wants the company to make a $17-billion offer, the Wall Street Journal reported November 20.

In one possible scenario, Hershey would contribute at least $10 billion in cash and $2 billion in new shares, the Journal reported. Former Goldman Sachs Group banker Byron Trott is talking to investors about supplying an additional $3 billion to $5 billion in cash to help with the purchase, the newspaper said.

The trust would sell assets, though it would try to maintain control of Hershey, the Journal said. Nestle has an option to sell its majority stake in eye-care company Alcon to Novartis as early as January, and could use the proceeds, which may total more than $20 billion, to make acquisitions.

“That’s enough money to get you in the game for sure,” Brian Krawez, a senior research analyst at Scharf Investments in Santa Cruz, California, said in an interview earlier this month. “I think they could blow Kraft out of the water.” Krawez, who holds Cadbury and Nestle shares, has no Kraft stock.

Nestle, the world’s biggest confectionery company, may confront antitrust obstacles if it bought Cadbury. “Nestle would face a host of market competition authority difficulty with chocolate,” said Thomas Russo, a partner at Lancaster, Pennsylvania-based Gardner Russo & Gardner, which holds Nestle, Cadbury and Kraft shares.

“Gum itself may be an additive without any competition authority problems for Nestle because they are not in gum,” he said earlier this month.

Chewing gum brands account for 35% of Cadbury revenue. Ferrero, the closely-held candy maker based in Pino Torinese, Italy, is meeting in the coming days to make a decision on Cadbury, a person briefed on the matter said.

The only way Hershey, which makes and sells Cadbury brands in the US, could finance a bid is if the trust decided to move to a single-class share structure, relinquishing its control and making it easier to sell new stock, said Pablo Zuanic, an analyst at JPMorgan Chase in London. The 104-year-old Hershey Trust, which funds a Pennsylvania school, cancelled an auction for Hershey in 2002.

It rejected a joint Cadbury-Nestle bid and another offer from Wrigley following opposition in the company’s home state. “The typical argument that gets companies into trouble is that this is a deal you cannot afford not to do,” Russo said. “Nestle generally has been able to steer clear of such entreaties and I suspect they will be again here. If they do act, it will be because they recognise an opportunity that’s core and strategic and properly valued.”