| CATEGORY: BROKER RECOMMENDATIONS SECTOR: FOOD PRODUCTS |
Broker snap: Sell a chunk of Cadbury |
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Mon 09 Nov 2009
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LONDON (SHARECAST) - Cadbury shareholders should get ready to reduce their holdings if they have not already done so, ahead of this afternoon’s ‘put up or shut up’ deadline for a bid from US processed foods group Kraft Foods.
That’s the advice of Charles Stanley, which has a ‘reduce’ recommendation on the shares. The broker believes the investment community has become increasingly sceptical about Kraft’s willingness to launch a knock-out bid.
If one assumes, the broker argues, that Kraft can extract more costs from Cadbury than currently envisaged, ‘the US foods business could raise the cash component of the offer to circa 70% (from 40%) and still achieve a 3.5x net debt / EBITDA [earnings before interest, tax, depreciation and amortisation] ratio sufficient to maintain its credit rating and all the more so if it were to sell on Cadbury’s gum operations to a third party such as Nestle.’
Charles Stanley feels that an offer worth 850p a share would be sufficient to win over the majority of Cadbury shareholders after the apparent worth of the venerable UK chocolate maker was boosted by a recent upbeat trading statement.
‘Doubts remain regarding the sustainability of Cadbury’s recent trading improvement,’ Charles Stanley believes, and thus the US company may not feel inclined to radically lift its initially sighting shot of an offer worth around 745p a share.
‘We suspect that an offer valuing the business at circa 780p per share or less may make a deal harder to sell to investors only too aware of Cadbury’s unique and to some extent iconic status,’ says Charles Stanley analyst Jeremy Batstone-Carr.
‘Whilst some investors may wish to hold on in the hope of a higher bid, many may now be encouraged to reduce or even sell holdings in their entirety with the aim of picking the shares up at lower levels should Kraft’s approach not succeed,’ the broker says, adding that Kraft may well opt to come back in six months time after seeing just how sustainable Cadbury’s recent surge is.
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