It's time to sell Cadbury

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Cadbury (LSE: CBRY) has received another bid from Kraft. But although this one's lower, Cadbury's share price didn't drop at all.

We'd suggest that provides a great selling opportunity – here's why.

Kraft Foods has just fired the next shot in its hostile takeover battle for chocolate-makers Cadbury – and the US group is playing hardball. The latest bid was worth less than 720p per Cadbury share, based on 300p in cash and 0.2589 new Kraft shares for each Cadbury share. That's worth some 4% less than the last bid made in September.

So you'd expect Cadbury shares, which started the day's trading at 758p, to have dropped back in disappointment. Not a bit of it – in fact they ended the day slightly higher. OK, the FTSE 100 ended up almost 2% yesterday, which helps all share prices, but it's still unusual.

What's going on? Clearly the market is gambling that Kraft hasn't finished yet and that it will come back with a higher bid in due course.

That could happen. In today's febrile atmosphere, with traders and investment bankers encouraged by loads of almost free money being pumped in by the financial authorities, anything is possible.

But even at that, the 'upside' seems unlikely to be more than 800p, i.e. only around 5% higher than Cadbury's current market price. As William Hobbs at Barclays Wealth says, Kraft has been "aided by the apparent absence of other interested parties". In other words, there isn't a huge queue of counter-bidding rivals.

Remember that before Kraft came onto the scene, Cadbury shares were languishing at around 570p, i.e. they're up by a purely bid-related third since early September. On 'fundamentals', Cadbury now looks pricey on a prospective p/e of 18 and yield on just 2.5%. So there's plenty of scope for the shares to slump if Kraft walks away.

5% upside, up to 25% downside - if you own the shares, selling Cadbury now seems to make sense. However, while the more daring among you might be considering short-selling, given that the price is likely to be volatile while the whole takeover process unfolds, we wouldn't recommend it for now.

Comments (4)

Published in Blog More articles by David Stevenson

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