Kraft Foods Looks to Sweeten Offer

GOOD MORNING. Good Morning: stocks in Asia closed higher today; U.S. futures are pointing to a higher open.

Let the food fight begin. Ending weeks of speculation, Kraft Foods (KFT) is expected to formally launch a hostile takeover bid for Cadbury (CBY) today, taking its offer to buy the British chocolate maker directly to shareholders. Kraft had previously offered around 10.2 billion pounds ($17.1 billion),or 745 pence a share, which Cadbury’s board had rejected, and Kraft may have to sweeten its bid quite a bit. Cadbury’s stock closed at 758 pence on Friday, and analysts say Kraft may have to offer well above 800 pence to convince a majority to sell.

The clock is now ticking too. The U.K. Takeover Board demanded that Kraft formalize its offer in a “put up or shut up” move, and Kraft now has 28 days to send a formal bid to shareholders, followed by a standard 60-day period of consideration. Cadbury’s board so far appears steadfast in rejecting Kraft’s offer, arguing that it can prosper independently—a case bolstered by a better-than-expected earnings report last week (Cadbury CEO, Todd Stitzer, told shareholders, “We have great momentum in our business.”) Kraft, meanwhile, has been struggling to meet growth targets; the company reported earnings of 55 cents a share for the quarter, beating profit forecasts for 48 cents a share, but lowered its revenue guidance for the year. And investors don’t seem impressed with Kraft’s results; the stock has been flat in 2009, trailing the S&P 500 by 18 percentage points.

Analysts figure Cadbury’s board is simply holding out for a better offer, and it may not have much more say in the matter. Hedge funds have piled into the stock and may vote to make a quick profit on their shares. Plus, Cadbury may not have other suitors. A tie-up with Unilever (UL) makes scant strategic sense, according to analyst Martin Dolan of Execution Limited, a U.K. brokerage firm. Hershey (HS) is too small to make a credible bid and joining Nestle would raise antitrust concerns of a chocolate and candy monopoly.

So what’s the right price for Cadbury? Kraft could afford to pay upwards of 900 pence or $20.8 billion without risking its credit ratings, says Dolan. That would value Cadbury at 13 times 2010 earnings before interest, taxes and amortization, up from a multiple of 10.7 today. That might seem rich, but Dolan points out that Kraft has identified cost-cuts and synergies that account for 35% of Cadbury’s earnings, making that 13 multiple more reasonable. “Strategically it makes the most sense for Cadbury,” he says. “It’s about getting the right share price.”

IN OTHER NEWS:

Investors will see how well Electronic Arts (ERTS) can handle the competition when the video game company reports earnings after the market closes today. Analysts are expecting earnings of 7 cents a share, better than last year’s loss of 6 cents a share in the same quarter, but still representing a slight drop in revenue compared to a year ago, to $1.12 billion.

Competitors including Activision Blizzard (ATVI) and THQ Inc. (THQI) have reported better-than-expected results and reiterated their original guidance for the year, “so the pressure’s on [Electronic Arts] to see what they’re going to be able to do relative to their peers,” says Benjamin Schachter, an analyst with Broadpoint Amtech.

Though the performance of the recently-released “The Beatles: Rock Band” was less impressive than expected, the sales don’t matter much to Electronic Arts’ bottom line because the company is just the distributor of the title, not the owner of the intellectual property, says Brian Sozzi, an analyst with Wall Street Strategies. The bigger recent problem for the company has been “Madden fatigue”--the falloff in popularity of the wildly successful video football game. Though Madden is likely to do well during the crucial holiday season, it is not one of the hot games. Instead, analysts are expecting the new “Call of Duty” from Activision and “Assassin’s Creed” from Ubisoft to dominate. One glimmer of hope: If consumers buy new systems for the holidays and start shopping for games next year, Electronic Arts would benefit, along with other makers and distributors.

When the company reports this afternoon, many analysts expect Electronic Arts to lower its guidance for the year. Investors will be watching to see how much cost cuts have helped the company’s bottom line.