Hot Stocks: With Alcon Sold, Will Nestle Try to Outmuscle Kraft in a Bid for Cadbury?

Is a bidding war brewing for Cadbury PLC (NYSE ADR: CBY)?

In a widely anticipated move, Nestle SA (PINK: NSRGY) said yesterday (Monday) that it would sell its remaining 52% stake of Alcon Inc. (NYSE: ACN) to Swiss drug maker Novartis AG (NYSE ADR: NVS) for about $28 billion. That influx of cash could give Nestle the financial firepower to go up against Kraft Foods Inc. (NYSE: KFT) in a competing bid for Cadbury.

Nestle is always "open to acquisition opportunities if they fit strategically," Chief Executive Officer Paul Bulcke told The Wall Street Journal in September.

Bulcke declined to comment on a possible deal with Cadbury in a November interview with The Journal. But on Dec. 5, two people familiar with the talks told Bloomberg that Hershey had contact with Nestle about a possible partnership to counter Kraft's hostile takeover of Cadbury.

The notion of a Nestle bid for Cadbury has merit. Among the escalating activity in the merger-and-acquisition (M&A) market is marked growth in deals among food companies. For instance, PepsiCo Inc. (NYSE: PEP) is proposing buyouts of The Pepsi Bottling Group Inc. (NYSE: PBG) and PepsiAmericas Inc. (NYSE: PAS).

Kraft's bid for Cadbury - so far uncontested - is expected to be rejected by shareholders today (Tuesday). Cadbury's board of directors last month called the offer "wholly inadequate." Kraft could raise its $16 billion bid for Cadbury, since the shares of the latter have risen more than 37% since the bid was revealed on Sept. 7.

In fact, the roughly $49 a share that Kraft offered for Cadbury - a 31% premium over the target company's Sept. 4 closing price - is now actually less than Cadbury's market price. Cadbury's shares closed yesterday at $51.65 each. That scenario typically signals that investors are expecting either a sweetened offer from the suitor - or a rivaling bid from another player.

A Nestle bid for Cadbury would likely include a partner - either The Hershey Co. (NYSE: HSY) or Italy's Ferrero SpA - that would help Nestle avoid antitrust hurdles.

Cadbury has almost 29% of the global gum market, which would give Nestle a boost in its confectionary business. Nestle's candy business accounted for just 10% of the parent company's total revenue in the first nine months of 2009.

The other big player in the sector is privately held Mars Inc., which became the world's largest confectioner last year when it teamed with Warren Buffet's Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B) to buy chewing gum icon Wm. Wrigley Jr. Company for $23 billion. Mars' 14.8% global market share of the confection business is almost double that of Nestle, according to data from research firm Euromonitor International.

Hershey would prefer to bid for Cadbury alone, but such a scenario is unlikely as the Pennsylvania chocolate maker has $1.7 billion in net debt and a market capitalization of $8.9 billion. Cadbury is valued at $17.7 billion, so a joint bid, in which Nestle and Hershey split Cadbury in half would make sense.

"You could imagine [Nestle] will be taking a very close look at [Cadbury]," Warren Ackerman, an analyst at Evolution Securities, told The Guardian. "Publicly Nestlé has said there are no big deals on the horizon but that it might do bolt-on acquisitions. So they wouldn't be interested in the whole of Cadbury, but it is plausible that they could do a consortium bid - with Hershey taking the chocolate business and Nestlé taking the chewing gum and candy."

If Nestle chooses to go in a different direction, it might look for something a little healthier.

"This divestment of our interest in Alcon will enable our management to concentrate on accelerating the development of Nestle's position as the world's leading nutrition, health and wellness company," said Nestle CEO Bulcke.

Possible deals Nestle could look at in the nutritional space would be for a yogurt-related deal, such as one with Groupe Danone SA (OTC ADR: DANOY) or General Mills Inc.'s (NYSE: GIS) Yoplait brand, Morgan Stanley (NYSE: MS) analyst Michael Steib told The Journal. Another possibility, says Nomura's Hayes, would be baby food maker Mead Johnson Nutrition Co. (NYSE: MJN).

There's still one more scenario: Analysts said yesterday that Nestle's plans to buy back $9.6 billion worth of its own stock could signal that no big deals are imminent, BusinessWeek reported.

Shares of Nestle closed at $49.54, a gain of 2.46% yesterday, while Cadbury also rose, closing at $51.65 - an increase of 0.51%.

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