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Cadbury’s is not the only UK stock to tempt Wall Street, says Newton’s Russon

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Ben Russon, manager of the Newton UK Opportunities Fund, has already seen his long standing investment in Cadbury’s appreciate following the surprise bid approach from the US foods giant Kraft last week, which saw the UK confectioner’s price rise close to 40 per cent.

However, like the management of the ubiquitous chocolate maker, Russon suspects that there is still some way to go before we see a credible offer for the company.
 
“Cadbury’s is the last remaining chocolate franchise in the UK and one of the very strongest brands to ever emerge from this country,” he says. “This unique appeal has made it a perennial favourite among commentators to be taken out in a deal like this. However, Kraft, the world’s second largest food business, may need to sweeten the deal if it is serious about adding Cadbury’s to its existing portfolio.
 
“Since Cadbury’s spun off its troublesome Schweppes drinks business last year,” says Russon, “the company has offered attractive growth potential from both chocolate consumption in emerging markets and from its gum business – one of the strongest growth sectors of the confectionary market. So far, Kraft’s bid is based on far lower multiples than the last major deal in this sector when, Mars bought Wrigley in May of last year.”
 
The proposed GBP10.2bn deal, which equates to 745p a share – a 31 per cent premium to the company’s closing price on 4 September – was immediately declined by Cadbury’s chairman, Roger Carr, as an “unappealing prospect”. Even so, the approach has signalled to many that the UK market may be in for another flurry of merger and acquisition activity. 
 
The approach for Cadbury’s and the news of the Orange and T-mobile joint venture has been enough to spark talk of a return to the kind of M&A activity that has not been seen for several years.

“This time around though, it won’t be private equity buyers who make all the running as the flood of cheap borrowing has just dried up. Instead, we expect this phase to see the real sector champions emerging in line with Newton themes such as ‘all change’ and ‘large cap laggards’. It will be those companies with secure positions in their core markets and large battle chests that we will see emerging opportunistically to buy up the growth potential of their smaller and now weaker rivals,” says Russon. 
 
Russon is reluctant to make himself a hostage to fortune by pointing to potential UK take out candidates, but as he says: “There is no shortage of potential UK candidates in areas like resources, where challenging fundamentals such as depleting reserves may drive activity at some point. More tellingly, there are many UK stocks which, like Cadbury’s, offer attractive growth potential outside of the UK while still generating sufficient free cash flow to finance an acquirer’s approach. This could well prompt a ‘clash of the titans’ in the coming months.”

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