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Kraft-Cadbury as a Frame of Reference for Private Equity Transactions
Many reporters and market commentators subscribe to a certain narrative about the
supposed excesses of the largest private equity acquisitions agreed to in the years
immediately preceding the onset of the credit crunch. Yet, according to data from
Standard & Poor’s, the large private equity transactions from that period were actually
valued and financed more conservatively, on average, than Kraft’s acquisition of
Cadbury.

Valuation. Kraft intends to pay 13-times Cadbury’s 2009 earnings before interest,
taxes, depreciation and amortization (EBITDA). This is much more than private equity
firms paid for large companies, on average, during 2002-2008. The chart below (from
S&P Leveraged Commentary and Data), shows the average purchase price multiple for
private equity acquisitions from 1987-2008. During the supposed “bubble” of 2006-
2008, the average PE acquisition was valued at about 9.5-times EBITDA, or 27% less
than Kraft’s bid for Cadbury (alternatively, Kraft paid a price that was 37% more than the
average large private equity transaction of 2006-2008). The typical large private equity
transaction during the valuation peak of 2007 was priced at a 25% discount to Kraft’s
acquisition of Cadbury (Kraft paid a 33% premium relative to the 2007 large PE
average).
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Financing. Based on current stock prices and exchange rates, cash comprises 60% of
the bid, or $11.6 billion. According to its most recent financial report, Kraft had $2.996
billion in cash on its balance sheet. The cash for the acquisition will come from the sale
of existing businesses and $9 billion in acquisition financing from a syndicate of nine
banks. The details of the financing will be provided in the Final Offer Documents, but
the financing is expected to take the form of leveraged loans sold to institutional
investors. The main proponent of the leveraged financing was Warren Buffet, who
opposed the use of more equity to complete the deal.
With $9 billion of acquisition financing and an existing debt load of $2.24 billion, the total
debt of $11.24 billion is equal to 6.74-times Cadbury’s 2009 EBITDA of $1.67 billion.
This leverage ratio is 24% higher than the average debt-to-cash flow ratio for large
private equity acquisitions from 2005-2008. Even in 2007, the average large private
equity transaction relied on 8% less debt than Kraft’s acquisition of Cadbury.
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