Kraft shareholders woke up $12 billion richer this morning and for that they should thank their lucky stars—–or at least send a case of Cristal to Janet and her merry band of money printers. Having passed-out free money to carry traders for 75 months running and after inserting a liquidity and verbal “put” under every market dip since March 2009, the money printers had generated downright giddiness (as of Monday night!) in the Wall Street casino.
And when it came to the shares of Kraft, the casino was indeed giddy even before the deal was announced. A few months ago when it was trading about $55/share, the company was already valued at 31X its $1.75 per share of net income for the year then ending.
So now those fast money traders who somehow “got wind” of the deal early are just plain tickled pink. At $83 per share they are up 50% on their cash position and several hundred percent on their call options. That’s quite the pay day, amounting to about 47X last year’s earnings on Jell-O, Kool-Aid, Lunchables, Maxwell House, Oscar Mayer, Philadelphia cream cheese, Planters peanuts and Velveeta spreads.
Setting aside the Kool-Aid, you might wonder how hot dogs, peanuts and sliced cheese are really worth such a snappy valuation multiple. Actually, however, that’s not the complete wonder of it. In the year just ended, Kraft posted an hardly impressive $2.9 billion of adjusted EBITDA less CapEx. Yet the casino is now pegging its total enterprise value (TEV) at $58 billion—-including about $9 billion of net debt.
Can you say 20X free cash flow? Well, Warren Buffet can. Gushing away in a statement accompanying the deal, the Oracle of Omaha said:
“I am delighted to play a part in bringing these two winning companies and their iconic brands together. This is my kind of transaction, uniting two world-class organizations and delivering shareholder value. I’m excited by the opportunities for what this new combined organization will achieve.”
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