Kraft Foods Inc (KFT), the world's second largest food company and the largest in North America, unveiled a surprising bid for Cadbury Plc (CBY) over the Labor Day weekend. For each Cadbury Plc share, Kraft Foods proposed to buy for 300 pence in cash and 0.2589 new Kraft Foods share, for a total value of 745 pence. The entire share capital of Cadbury Plc is valued at £10.2 billion or approximately $16.8 billion (based on share prices and exchange rates on September 4, 2009). So far, Cadbury has turned down the offer

Kraft management branded the proposed acquisition as the company's strategic move to build a global powerhouse in snacks, confectionery, and quick meals. Specifically, Kraft believes combining KFT& CBY can be justified by the following value propositions:

1. The combined company could target long-term organic revenue growth in excess of 5% and sustainable long-term EPS growth of 9 to 11%, whereas Kraft targets long-term organic revenue growth of 4% and EPS growth of 7 to 9% on a standalone basis.
2. The higher long-term growth rates in revenues and bottom lines will be driven by revenue synergies and $625 million identified annual cost savings.
3. Cadbury is highly complementary to Kraft's geographical footprint and will increase developing markets' contribution to Kraft's net revenue from about 20% to about 25%.
   
   Kraft management has been banging the familiar synergy/strategy drum hard regarding the significance of the acquisition, and claims itself a disciplined buyer. While increasing exposure to developing markets does sound appealing and increasing top line growth by 1% on a large revenue base is worthy of applause, we are not sure those promises justify the price tag. Based on the proposed price of 745 pence per ordinary share or approximately $50 per ADR, CBY needs to deliver top line growth of 10% and EBITDA margins of 27% each year from 2010 to 2014 to justify the purchase price. Historically, CBY's organic top line growth has been in the range of 4-6% and its EBITDA margins have declined from 22% in 2004 (peak) to 15% in 2008 (trough). It doesn't take a brain surgeon to conclude, it will be very hard for CBY to achieve those lofty operational assumptions in the future to deserve the purchase price.