After weeks of sitting on the sidelines while Cadbury (CBY) played cat-and-mouse with Kraft Foods(KFT), Hershey (HSY) is finally ready to make a bid for the UK-based chocolate maker.Cadbury has repeatedly said that Kraft's $17.2 billion offer is too low and the company's largest shareholders expect Kraft to up its offer once more.
The Wall Street Journal reports that sources close to the Hershey board say that the company will bid $17.9 billion for Cadbury. The offer, which involves Hershey borrowing $10 billion, is "75% to 80% likely." The paper also reports that the bid will come after the deadline set by the UK government for Kraft's final bid, which is January 19.
Hershey is taking a substantially greater financial risk by bidding for Cadbury than Kraft. Kraft has a market cap of $43 billion and its net income will probably come in well over $2.5 billion this year. Hershey's market cap is $8.3 billion and its net income will be less than $500 million. A $10 billion loan means Hershey will be taking on tremendous leverage, which will put much more pressure on future earnings improvement than it would for Kraft.
The key to Hershey's long-term success if it wins a bid is a strong improvement in Cadbury's earnings and the cost cuts and economies of scale that are supposed to come from big buyouts. That's a lot of "ifs" for Hershey shareholders
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