Broker snap: Cadbury softens on Kraft results

LONDON (ShareCast) - The share price of Crème Egg maker Cadbury (LSE: CBRY.L - news) was looking a little runny on Wednesday morning as hopes of US predator Kraft Foods (NYSE: KFT - news) upping the terms of its proposed offer for the UK company faded.

The US company announced a dip in third quarter earnings after the bell yesterday and lowered its full-year net revenue guidance, prompting a fall in the share price that will devalue the equity element of any offer by Kraft for Cadbury.

The market had been hoping for Kraft to launch a knock-out bid of 800p or more, but JP Morgan Chase now believes Kraft is unlikely to go higher than 780p and suggests 'such an offer with only a 30% stock component may be enough.'

No rival bids for Cadbury have emerged while Kraft, though it has the bridging finance in place to fund a bid, has pledged not to get carried away in its pursuit of the 185-year old confectionery company.

'We now assume a lower price on lack of competing bids, lower synergy assumptions, and our growing belief Kraft could walk away,' JP Morgan said.

Panmure Gordon believes that the disappointing third quarter results from Kraft will not help the US company's cause, but the news about the bridging finance does at least raise the prospect of Kraft boosting the cash element of its bid.

'Apart from the usual bluster from Kraft about not over-paying, the only real new news was that Kraft has raised $9bn of bridge financing, which is enough to raise the cash element of the bid from 300p to 400p as we have previously suggested,' writes Panmure analyst Graham Jones.

The two companies appear to be far apart on a fair valuation of Cadbury, the broker believes, and expects the US company, in the absence of a competing bid, to grab Cadbury on the cheap, with the option of increasing its offer at a later date if institutional shareholders do not go for the first offer.

'Kraft needs to be careful not to alienate Cadbury shareholders with an excessive low opening offer,' however, the broker suggests, adding that the value of the bid based on the terms first suggested by Kraft to Cadbury at the end of August is currently 732p per share, which 'is barely a premium to the global food sector, and we feel would quite rightly be rejected by Cadbury shareholders.'

Panmure Gordon has a price target of 900p and a 'buy' recommendation for Cadbury but reckons the share price could head south to 700p if a bid fails to succeed, or even materialise.