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If Kraft Foods Inc. is successful in its hostile bid for Cadbury PLC – or if another buyer emerges – the combined company might well put some assets on the block. If it did, it wouldn’t find itself wanting for private equity interest.
Private equity firms are well acquainted with Cadbury’s stable of products, which includes Trident gum and Dairy Milk chocolate. Even before Kraft first floated an offer for Cadbury in September, private equity firms had looked at Cadbury. An official at a large, New York-based buyout firm said the firm’s principals have known executives at both Kraft and Cadbury for years, and have looked at Cadbury’s books.
Cadbury as a whole is valued at GBP9.8 billion by Kraft’s bid, which is too rich for the private equity industry to pull off at the moment, given the still limping debt markets. But PE firms would be interested in any slivers of the businesses that might come up for sale, the executive said.
Buyout firms like the food sector, thanks to its steady cash flow and recession-proof demand for its products. Many firms already own companies that assets of Kraft or Cadbury could be folded into.
Blackstone Group, for instance, controls Pinnacle Foods Group, which makes things like Duncan Hines cake mixes, Hungry Man frozen dinners, and Vlasic pickles, comparable to assets in Kraft’s portfolio. Blackstone itself is already familiar with Cadbury, having bought beverage company Orangina SAS from Cadbury in 2006 in partnership with Lion Capital.
A few of the other firms currently active in this sector include Warburg Pincus, which took a stake earlier this year in U.K.-based Premier Foods plc, which provides such products as Hovis bread, Mr Kipling cakes and Bisto gravy; European buyout firm Permira, which owns frozen food company Birds Eye iglo Group; and CVC Capital Partners Ltd., which owns Leaf, the former sugar confectionery unit of Dutch food group CSM.
Corporate carve-outs are attractive for PE firms at the moment – witness AB InBev’s acquisition of Anheuser-Busch last year, which has generated at least four spin-out deals for the buyout industry to date. Firms like these sorts of deals for several reasons. For one, the PE industry has plenty of experience in this type of deal, which often entails things like installing new management and new back-office systems. For another, the sellers don’t mind retaining some stake in the upside of such deals, whether by offering seller financing or keeping a small stake in the assets being sold. That helps get deals done in a climate where buyers and sellers remain some distance apart on price.
If a Kraft-Cadbury combination does happen, Terry Bivens, food analyst with JPMorgan Chase & Co.’s investment banking division, said neither Kraft nor Cadbury would be in a hurry to unload assets, but that Kraft could certainly chop off some slow-growing brands.
One thing that could hit the block is coffee maker Maxwell House. “If it’s not a growth business, it’s certainly a stable business” that throws off steady cash flow, Bivens said.
Another brand that could be sold is packaged meats provider Oscar Mayer, as well as some European brands that might overlap with those of Cadbury, Bivens said.
Maxwell House could fetch as much as 10 times earnings before interest, taxes, deprecation and amortization, implying an enterprise value of up to $3.5 billion, according to Bivens. Oscar Mayer could receive seven to eight times Ebitda, representing a price tag of up to $1.5 billion.
Such valuations would put both brands within reach of private equity firms, though strategic buyers such as Sara Lee Corp. and HJ Heinz Co. might well offer some serious competition.