By Victoria Howley and Michael Erman
With Cadbury lacking a white knight bidder to come to its rescue in the face of Kraft's $16.1 billion bid, the two companies are set to face off on one question: How much is Cadbury really worth?
Kraft, North America's biggest food group, will step up its charm offensive in meetings next week to persuade US investors to support its offer for UK confectionery company Cadbury.
Cadbury is also expected to follow its rejection of Kraft's approach with a value-based defense, looking to previous deals that paid higher multiples for similar assets.
The two companies seem to have been set on a series of maneuvers from the standard unsolicited deal playbook.
Kraft has already begun meeting with its own shareholders as well as Cadbury investors, according to a company spokesman.
It is likely to play down the UK company's ability to create value as a stand-alone entity.
"The tone they'll strike will be to say how much better Cadbury would be together with Kraft," an investor who has stock in both companies said.
He added that he thought Kraft would eventually improve its offer to 800 to 820 pence per share in order to gain access to Cadbury's books, before increasing it again to around 850 pence to seal a deal.
Kraft's original cash and stock bid valued the company at 745 pence per share, but that has since dipped to around 705 pence as Kraft shares and the dollar have fallen.
Analysts expect Kraft will raise its bid, or at the very least increase the cash portion of its offer.
"Clearly the market believes that somebody will pay more than the current bid," said Morton Pierce, chairman of U.S. law firm Dewey & LeBoeuf's mergers and acquisitions group.
He noted that Cadbury's shares were trading more than 10 percent higher than Kraft's offer, and that Kraft would likely still have to offer a premium to shareholders.
"You want to try to close it out quickly, and that's not going to happen if you're below the market," Pierce said.
Pierce said he believes Kraft is ready to go hostile and take the bid directly to shareholders if it can not bring Cadbury to the table soon.
"It's in your strategic advantage to press forward to show that you've thought this through and that you're prepared with your next step," he said.
The only real possible counter bid is likely to come from Nestle and Hershey combining to break up Cadbury to avoid any anti-trust concerns. However, Nestle has not seemed to be interested in the chewing gum business and some analysts wonder whether Hershey can afford Cadbury's chocolate.
"It seems that the most synergies could be gained by Kraft," said Stephen Velgot, special situations analyst for Susquehanna. "Nestle would have obvious antitrust issues in different parts of Europe which is why the thought was that they could divide the company with Hershey. But when you bring in multiple parties to a bid it complicates things."
Cadbury's shares surged more than 38 percent in the first two days after Kraft's offer. They have settled about 10 percent higher than the current bid, giving some credence to Cadbury's value-based defense.
Kraft's original offer, including debt, equated to around 12.9 times Cadbury's expected 2009 EBITDA, according to Reuters Estimates. That compares to an average price of 14 times for big food deals over the last 10 years, though Wrigley was bought by Mars last year at a price of 17.6 times.
A bid at about 14 times expected EBITDA would equate to around 820 pence.
Cazenove analyst Polly Barclay estimated in a research note that fair value for the company based on three different metrics was somewhere between 788 pence and 873 pence.
Cadbury should be executed to play up that value gap. The company, which is in the middle of a cost cutting program, could also move forward its third quarter update from October to illustrate its success.
One possible problem for Kraft is that the company does not have that much room to raise the cash portion of its bid -- currently about 42.5 percent of its offer -- without threatening its balance sheet or risking its investment grade credit rating.
The company could examine an equity offering or cut its dividend as methods to raise cash, but neither scenario would sit well with its own shareholders.
One arbitrage investor who asked not to be named said that Kraft should be patient -- waiting a few weeks could take some steam out of Cadbury shares if no counterbidder presents itself.
"Life as an independent company is really not feasible when you have a 40 percent down side," the investor said.
Cadbury declined to comment.