Critical credit credentials

IFR Top 250 Borrowers 2010
4 min read

Kraft Foods proved to be as skilful a takeover artist as it was a borrower in its dogged pursuit of Cadbury in the last year. It assembled an enviable bank group to back a hostile acquisition, syndicated the loan when banks were as stingy as ever and successfully priced a jumbo take-out offering of bonds into a tumultuous market. Michelle Sierra Laffitte and Timothy Sifert report.

After pursuing British confectioner Cadbury very publicly for five months, Kraft Foods reached an agreement with its target in January 2010. The £11.9bn (US$17.14bn) deal comprised 40% stock and 60% debt. To see the deal to fruition Kraft used aggressive takeover tactics as well as the US debt markets to its advantage.

Before the transaction was agreed, Kraft had put together a debt package of about £7bn (US$10bn). But most of the loan remained undrawn as Kraft braved the choppy debt markets in February and priced a four-part bond deal, which, after readjusting its spread, was completed with a brimming order book.

Citigroup, Deutsche Bank and HSBC led the bank loan from the start. Barclays Capital, BBVA, BNP Paribas, Credit Suisse, RBS and SG later joined the syndicate.

Kraft eventually agreed to pay 500p in cash and 0.1874 new shares for each Cadbury share. In addition, Cadbury shareholders agreed to receive a special dividend of 10p per share upon acceptance of the offer. That was up from Kraft’s original hostile offer of 300p in cash and 0.2589 of a new share.

Kraft’s initial bid valued Cadbury at £9.8bn with a 40% cash component. The new offer valued Cadbury at £11.9bn, with the cash component upped to 60%. The original £5.5bn bridge loan, which was syndicated in November, was subsequently increased by £1.5bn to make way for the larger, winning offer.

In another twist, before tapping the bond market, Kraft used proceeds from the US$3.7bn sale of its pizza business to Nestle to fund a partial cash alternative as part of its offer. Since the full proceeds from the asset sale took some time to come in, Kraft borrowed £807m under the bridge. This amount was later paid down and the bridge terminated when the sale of the pizza business was completed on March 10.

The bond deal was particularly ambitious given the market conditions. On February 4, as Kraft was circulating details of the issue to the market, fears over European sovereign risk and US unemployment stoked a sell-off and investors sought safety in Treasuries. The benchmark 10-year finished Thursday at 3.62%, down 11bp on the day, a tightening level that was consistent throughout the curve. But the deal was nonetheless popular, with the book size said to have topped out at US$27bn.

The US$1bn 3.25-year tranche was initially launched on Thursday morning at 137.5bp, following guidance of the 150bp area. The US$1.75bn six-year and US$3.75bn 10-year came at 185bp versus 187.5bp area guidance. The US$3bn 30-year was launched at 200bp, mirroring guidance of 15bp wide of the 10-year spread.

Price comparables for the Kraft deal were trading off from where they had been when the trade was announced. Kraft’s own 6.125% notes due 2018 had been quoted at a yield spread of 155bp–145bp earlier in the week but widened on the day of the deal to 177bp–172bp, wiping away the concession on the initially well-received deal.

The trade was expected to be completed in the early afternoon following the morning launch. Instead, the issuer relaunched the trade at around 2:45pm EST and pushed the spreads out by 2.5bp–5bp.

That turned out to be a good idea, and the new spreads sated most of the enormous order book. The bonds were quoted about 9bp tighter afterwards. BNP Paribas, Citigroup, Deutsche Bank, HSBC and RBS were active bookrunners.

“For a deal like this to get done with this kind of appetite during one of the more difficult weeks tells you there’s a huge amount of liquidity,” David Bassett, global head of syndicate at RBS, said at the time.

The deal also highlighted the relative strength of the US bond and loan markets. The acquisition loan drew a lot of bank support early on, even as banks have been stinting on corporate lending.