Cadbury's Todd Stitzer is Asking for a Lower Price

Yesterday I wrote that Cadbury's (CBY-NYSE ADR) CEO seemed rather impassioned about his attacks on Kraft Food's (KFT-NYSE) merger offer. I pulled my punches, though. The background data on my thesis is better than I let on.

On December 15 WSJ.com published a comment ("Cadbury's CEO Is a Real Paine" by Dana Cimilluca) about Paine's statements on a conference call Cadbury held to describe its case against the Kraft offer. Stitzer quoted Thomas Paine: "What we obtain too cheap, we esteem too lightly; it is dearness only that gives everything its value." To my ears, this has much more the tone of a woman who has failed to obtain sufficient obsequiousness from a potential mate than of anything to do with Revolution.

It is clear that Cadbury esteems Kraft rather lightly, Cimilluca writes, reporting that Stitzer said "Kraft is trying to buy Cadbury on the cheap to provide much needed growth to their unattractive low-growth conglomerate business model" (emphasis added).

Stitzer, likely facing a dimished role or unemployment if Kraft succeeds at acquiring Cadbury, has upped his target for long-term annualized revenue growth by 1%, from 4-6% to 5-7%. Targets for operating margins and dividend growth were also increased to make Cadbury appear more attractive.

Kraft's shares are stuck in a multi-year slump, currently trading for more than 10% less than their average price in 2006. Earnings have recently improved, with S&P estimating EPS of $2.00 for 2009 (ending 12/31). That puts KFT shares at a PE of less than 14, below its peers and potential. Perhaps Kraft's recent gains have made it anxious to begin spending its money on acquisitions?

This acquisition is a litmus test for Kraft management. If they do pay up for Cadbury, it is a sign that the company is willing to discard shareholder equity in exchange for top-line growth. Holding the line on price sends a far better signal to shareholders. So far, the signals appear to have been that KFT has made its only offer for Cadbury. If this holds true, expect an increase in KFT to $29 or $30 in the next few months.