Credit Herald

Kraft Foods Inc is once again turning to Europe to try to boost sales and improve margins, hoping to convince Cadbury to accept a buyout that could start a new round of food industry consolidation.

Kraft went public on Monday with a $16.7 billion bid after the British confectioner, known for its much-loved chocolate bars, rejected a cash and stock bid that valued Cadbury at 745 pence a share.

For Kraft, the deal is seen as a natural extension of a strategy to push into more overseas growth areas and also products like chocolate that offer higher margins than other parts of a portfolio that includes items like cheese and frozen pizza.

“This is just another step in that direction,” Morningstar analyst Erin Swanson said, noting that Kraft has been revamping its portfolio. The company has exited businesses where it was not a leading player or where prospects were limited.

At the same time it has made acquisitions like the 2007 purchase of Danone’s cereal and biscuits business, a $7.82 billion deal that expanded is footprint in Europe and other parts of the world with products like Lu cookies.

Swanson said the 2007 acquisition seems to have progressed well and that Kraft’s overhaul of its business has helped set the stage for the offer for Cadbury.

“It seems like they are definitely leaner and more prepared to take something like this on,” Swanson said.

A NEW WAVE OF DEALS?

Another round of consolidation in the food industry has long been seen as likely as companies struggle to increase sales in a mature sector that has also been hit first, by rising commodity costs and then a recession that has sent consumers looking for less expensive products paydayloans.

“Consolidation in the food sector has long been anticipated,” said a deal advisor who is not involved in the proposed deal and asked not to be named. “Given the drop in water revenues, Nestle and Danone are thought to be looking at acquisitions to spur revenue growth, the person said. More deals are likely to happen in the sector over the next 9 to 18 months,” the person said.

Kraft said that combining with Cadbury would create a company with leading market positions in developing markets like India, Mexico, Brazil China and Russia.

The company also said it could cut at least $625 million in costs annually, while also building up revenue by combining distribution and new product development.

In a videotaped statement, Kraft CEO Irene Rosenfeld also said of Cadbury: “I believe that in the current global economy, the growth prospects are constrained.”

HERSHEY, NESTLE COULD RESPOND

A source familiar with the situation said that Kraft has already had some discussions about financing the cash component of the deal, which the person didn’t believe would be a problem. A benefit in having the proposal made public is that it can talk to all its banking sources regarding financing, that source said. 

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