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 Arbitrage investors, who speculate on companies involved in ongoing deals, are betting that Kraft Foods Inc. (NYSE:KFT) will eventually snag U.K. confectioner Cadbury plc (NYSE:CBY) -- and will do so without much more of a fight, despite Cadbury CEO Todd Stitzer's recent statement that he does not believe Kraft's proposal makes strategic or financial sense for Cadbury. According to Reuters: One arbitrageur said there was money to be made from the Kraft-Cadbury dance, but no major excitement as it plays out. "This is lining up as a typical M&A play: unsolicited bidder lobs a reasonable, but not yet full price. Target balks. Bidder will likely tweak the price or the mix of securities being paid enough to trigger a negotiation. Deal happens. Pretty cut and dry," the arbitrage investor said. As such, some arbitrage fund managers revealed they were long Cadbury and short Kraft in a "typical arbitrage play." The Reuters article continues: "Others had not shorted Kraft's stock as much as they normally would in order to account for the possibility of a counterbidder. Some had doubled their risk by going long on both stocks -- known in the industry as a 'Texas hedge.' " Meanwhile, sources surmise that Kraft is strategically holding out a little while longer to prove that they are the only game in town interested in Cadbury's sweet stuff. Kraft's waiting game would also allow arbitrageurs, "who are more likely to be concerned with a short-term payday than a company's long-term prospects, to snap up a bigger share of Cadbury," Reuters says. Shareholders on both sides are expressing concerns, however. Large Cadbury shareholders are worried that Stitzer may be "overplaying his hand in trying to secure a higher price" while Kraft shareholders don't want the company to go more than 10% to 20% higher in its bid offer. Cadbury's shares are trading above the implied value of the bid, currently around 730 pence ($11.62) in cash and stock after surging more than 40% after Kraft's unsolicited offer on Sept. 7. Track Cadbury and Kraft's dealmaking at The Deal's Confectioners: Cadbury, Hershey, more Dealwatch and our Kraft Foods Inc. Dealwatch. - Sara Behunek
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From: Sara Behunek,
What do you mean Kraft is ready to pop, Ditch Witch?
Posted on:
September 30, 2009 9:51 AM
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Kraft is ready to pop. This cadbury deal may be the catalyst to make this happen.