KRAFT FOODS INC. $28 (New York symbol KFT; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 1.5 billion; Market cap: $42.0 billion; Price-to-sales ratio: 1.0; Dividend yield: 4.1%; WSSF Rating: Above Average) is the world’s second-largest food company after Switzerland-based Nestle S.A. Its leading brands include Kraft cheese, Maxwell House coffee, Nabisco cookies and Oscar Meyer meats.
Kraft is buying U.K.-based Cadbury plc (New York symbol CBY). Cadbury is a leading maker of confectioneries, including chocolate, candy and gum. Buying Cadbury will help Kraft sell more of its foods in developing countries. Moreover, chocolates and candies generate higher profit margins than Kraft’s packaged foods.
Kraft will pay $19.4 billion in cash and stock. That’s 17.6% more than its initial offer of $16.5 billion. As well, Kraft raised the cash portion to 60% from 40%. The deal should close by mid-2010.
To raise cash for the Cadbury purchase, Kraft is selling its North American frozen pizza business to Nestle for $3.7 billion. This business accounts for about 4% of Kraft’s sales.
Kraft estimates that it will cost $1.3 billion to integrate Cadbury into its existing operations. However, merging their distribution, marketing and product-development functions should cut the combined company’s annual costs by $675 million by the end of the third year. Kraft earned $824 million, or $0.55 a share, in the three months ended September 30, 2009.
Kraft’s $18.1 billion of long-term debt is 43% of its market cap. Its debt will likely grow to 60% of its market cap following the purchase. That’s still reasonable in light of Cadbury’s high-quality brands.
Kraft Foods is a buy.
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