Kraft is $4 Billion Sweeter from Cadbury Deal

Kraft Foods (NYSE:KFT), the world’s second largest food & beverage company after Nestlé (OTC:NSRGY) and a competitor to food industry players General Mills (NYSE:GIS), completed its acquisition of the confectionery giant Cadbury early this year for the whopping sum of $19.5 billion. Many criticized Kraft’s management for this deal, given that the company had to sell its lucrative North American pizza business to Nestlé in order to generate sufficient cash.

We expect the Cadbury acquisition to add a net $4 billion to Kraft’s market cap. Below we discuss the importance of the confectionery business (chocolate, candy and gum) to Kraft’s stock, and how Cadbury brings additional value to this business.

Chocolate, Candy and Gum constitute 32% of Kraft’s stock

Going forward, we estimate that chocolate, candy and gum sales will account for around 32% of the $35.64 Trefis price estimate for Kraft’s stock. Much of this contribution can be attributed to the Cadbury acquisition.

Here’s what Cadbury does for Kraft’s confectionery market share:

1. Kraft’s triples its share of global chocolate and candy sales

Before the Cadbury merger, Kraft was a bit player in the global chocolate and candy market, with a total share of around 5.5%-6%. Its primary offerings were Milka and Toblerone chocolates.

With the addition of leading Cadbury brands such as Dairy Milk, Creme Egg, Eclairs and Halls, Kraft is expected to gobble 15% of the global chocolate and candy market in 2010.

2. Kraft’s becomes the #2 global gum manufacturer

Cadbury’s strong gum portfolio includes popular brands such as Trident, Chiclets, Stimorol and Dentyne. As a result, Kraft’s share in the global gum market has soared from 0.1% in 2009 to around 27% in 2010. Kraft is now second only to Wrigley (NYSE:WWY), which controls 35% of the market.

In addition, Kraft can leverage Cadbury’s strong distribution channels and retailer partnerships in emerging markets such as India to promote its other products.

Cadbury Boosts Kraft’s Market Cap

We estimate that the Cadbury acquisition adds a net $4 billion to Kraft’s market cap, after subtracting the $19.5 billion cash purchase price. You can modify our forecast for Kraft’s share in the chocolate/candy and gum markets in the charts above to see the impact on the Trefis forecast of $35.64 for Kraft’s stock price.

You can see the complete $35.64 Trefis Price estimate for Kraft Foods’ stock here.