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As rivals weigh whether to top Kraft Food Inc's (KFT) GBP9.9 billion ($16.5 billion) offer for Cadbury PLC (CBY) they're confronting an unusual hurdle: Kraft has extracted exclusivity agreements from the banks it's using to finance its bid, leaving contenders with few other banks to choose from.
Kraft, which made a hostile offer for Cadbury on Nov. 9, is being advised by Lazards (LAZ) and has secured a GBP5.5 billion bridge loan from a group of nine banks lead by Citigroup Inc. (C), Deutsche Bank AG (DB) and HSBC Holdings PLC (HBC) and including BNP Paribas SA (BNP.FR), Barclays Capital, Royal Bank of Scotland Group PLC (RBS) and Credit Suisse (CS), Societe Generale SA (SCGLY) and Banco Bilbao Vizcaya Argentaria SA (BBV). The lead banks have cast the net even further and the number of banks financing Kraft's bid could grow to 18, a person familiar with the matter told Dow Jones Newswires earlier this month.
The banks providing the multibillion pound bridge loan have signed exclusivity agreements which prevent them from jumping ship to finance any rival bidders, according to several people familiar with the situation.
"Kraft is being very strategic and tactical - but it needs to be given the amount of paper and cash that it needs for its bid," commented Shore Capital's Clive Black.
Kraft's preemptive measure has shrunk the pool of banks available to finance counter offers, though it's not clear whether Kraft has hobbled its rivals enough to discourage them from bidding.
U.S.-based Hershey Co (HSY) and its controlling charitable trust are working with adviser JPMorgan Chase (JPM) and Bank of America's (BAC) Merrill Lynch to raise money, people familiar with the situation have said. Italian bank Mediobanca (MB.MI) and London-based Rothschild are advising family-owned Ferrero of Italy, they added.
Swiss food giant Nestle SA (NSRGY) has yet to declare an interest but is thought to be considering its options and position as the industry's landscape looks set to change.
A bank working with a major customer, whether as adviser or financier or both, is unlikely to risk its reputation by providing financing or advice to an alternative bidder.
Still, exclusivity agreements for financing banks-- except those leading the debt package--are rare in M&A transactions, according to Brett Barragate, partner and co-head of the financial institutions group at law firm Jones Day in New York.Barragate said.
"It's bad for (banks') business. They don't want to be tied up and shut out of other potential bids because they are working with one party. Only a borrower with significant leverage would be able to get banks to do this," Barragate said.
"Kraft likely wants to make sure it has the full and undivided attention of its advisers and it doesn't want the banks to be restrained in their capacity to lend to it," he added.
Even if Kraft hadn't limited the number of banks available to other potential bidders, and possibly the ability to raise the necessary financing, analysts say that rivals would find it a stretch to make a deal work considering the amount of leverage required, despite the currently hot state of bond markets.
Cadbury is 1.5 times larger than Hershey in terms of both sales and operating profits, so it would be difficult for the U.S. confectioner to go it alone, for one, says Charles Stanley analyst, Jeremy Batstone-Carr.
And while Ferrero is a similar size to Cadbury, and debt-free, having to raise the GBP10.3 billion reportedly required to match Kraft and keeping enough money back to see-off a possible higher bid from Kraft would be a stretch, he adds.
"It would probably require all three companies to gear up to some 5 times net debt to EBITDA, a huge ask...which would result in debt levels that would depend on how Cadbury assets might be dissected and on what geographical basis, in order that high gearing might be reduced as swiftly as possible," Batstone-Carr said.
Others say that Nestle has nothing to gain from launching a bid because the number and cost of the hurdles that it would face--in particular antitrust issues--could outweigh potential benefits.
"Nestle has no intention of exiting the confectionery market and has more than enough firepower to buy whatever it wants but would have to deal with antitrust regulators in practically all its markets and especially the U.K. where together with Cadbury it accounts for half the market," said industry consultant James Amoroso.
In Canada, Nestle is number one and Cadbury number 3 with Hershey in the middle. Even in the U.S., where Nestle is a distant third with just 9% of the market to Hershey's 44% and Mars' 26%, the critical mass that it would get in terms of sales from Cadbury's gum business don't justify a massive outlay for a disciplined company, he said.
If Nestle did merge with Cadbury, the Swiss group would have to sell a lot, which could give rivals a competitive advantage later, he said.
-By Kate Haywood and Marietta Cauchi, Dow Jones Newswires; +44 207 842 9241; firstname.lastname@example.org