Kraft-Cadbury Concord

Kraft and Cadbury have settled on terms, with Kraft increasing its offer from about $17 billion to $19.5 billion, in a deal that is part cash purchase, part stock-swap.

Hershey had apparently been planing a white-knight offer of $17.9 -- Kraft has obviously now leapfrogged past that. This purchase price is a multiple of 13 times Cadbury's underlying 2009 EBITDA.

I don't believe I've ever defined that acronym in this blog. Just for the record, then, EBITDA means "Earnings Before Interest, Taxes, Depreciation, and Amortization."

The acronym became popular when analysts noticed that the P/E ratio could otherwise be very misleading. According to an older theory, if a corporation's stock price reflected a low ratio of market cap to earnings, the stock itself was undervalued, and a good investment. Obviously, that is a theory that runs into some difficulty given the premise that capital markets are efficient (or even not horribly inefficient) at incorporating such data. But never mind that for now.

No ... the fatal problem for the P/E ratio, as it turned out, was that the earnings number incorporated a lot of fluff in terms of distinct ways of computing amortization, etc. EBITDA, then, is the "E" part of the P/E ratio with the subjective or fluffy stuff taken out, which is supposed to be a more relevant number for purposes of comparison.

As it happens, the "price" side of the old P/E ratio has been modified too over the years for the purposes of analysis. Instead of price-to-EBITDA, one often hears about Value to EBITDA, with value defined as price (i.e. market cap) + the market value of debt. That particular refinement is a subject for another day.

We'll give the final word to Cadbury Chairman Roger Carr: "We believe the offer represents good value for Cadbury shareholders and are pleased with the commitment that Kraft Foods has made to our heritage, values and people throughout the world. We will now work with the Kraft Foods' management to ensure the continued success and growth of the business for the benefit of our customers, consumers and employees."