Three weeks after Cadbury, the world’s second largest confectionery group, rejected a 10.2 billion pound ($16.7 billion) approach by Kraft, North America’s biggest food group, a UK Takeover Panel is expected to require Kraft to make a firm offer or walk away for six months, Reuters reported.

 

“The indications are that the UK Takeover Panel will impose a ‘put up or shut up’ deadline giving Kraft four to six weeks to make an offer,” said Shore Capital analyst Clive Black.

 

While a report in Britain’s Observer newspaper said a hostile bid was imminent, many feel Kraft will try and avoid going hostile given the complexity of any tie-up.

 

So far, Kraft has made an informal approach, which Cadbury rejected as too low. Bankers said Kraft’s dilemma is deciding the amount of the formal bid because the company will want a recommendation from Cadbury’s board and to gain access to the company’s books.

 

Credit Suisse estimates that the current proposal is worth about 12.5 times 2009 EBITDA but analysts believe an offer of closer to 14 times 2009 EBITDA could lead to an agreed deal.

 

“Based on the average valuation for previous deals, Kraft’s debt capacity and the potential for upgraded synergies, we see an 850 pence offer fully valuing Cadbury. This would be 16.3 times 2008 EBITDA and 13.4 times expected 2009 EBITDA,” said Orianna Segaud, an analyst at Natixis Securities.

 

Most predict Kraft will not walk away from Cadbury before making a formal bid because there are sound strategic reasons for the deal, Reuters reported. For Kraft, the transaction is a natural extension of a product strategy to push into high growth and high margin areas.

 

“This is the start of a long campaign and the one thing we can rule out at this stage is Kraft walking away very soon,” said the senior banker. 

 

There is also the possibility that a counter bidder will enter the picture. Large Cadbury investors are worried Chief Executive Todd Stitzer may fend off Kraft’s offer, with no obvious rival in sight to begin a bidding war.

 

But Black expected Cadbury to be “courting counter bidders like mad” and said the “often talked about combination of Nestle and Hershey Co.” would be the most likely counter bid.

 

Natixis’ Segaud didn’t see Hershey and Nestle combining because the Hershey Foundation-its majority shareholder-would not want to see its stake diluted. For Nestle, competition issues in the chocolate market in the UK or Brazil would complicate matters.

 

Britain’s Observer newspaper on Sunday reported that Kraft was poised to launch an 11 billion pounds hostile bid for Cadbury.

 

Another senior banker said it would be strange for Kraft to go hostile before they have their financing in place. “Market speculation suggests Kraft are not yet there on the financing. They could argue with the Takeover Panel that they need a longer period in which to make a bid to get the financing in place,” the banker said.

 

“If they go hostile, it will be toward the end of the Takeover Panel timeframe,” another analyst predicted. “They would do this hoping that the Cadbury share price has come down and to trigger a 60-day offer period.”