Sample Financial Analysis Report 7240AFE Issues in Advanced Corporate Finance

1 Apr 2011

Cadbury Australia Pty Ltd

EXECUTIVE SUMMARY Cadbury Australia is engaged in the manufacture, distribution and sale of confectionery and grocery products. The Company's principal product groups include confectionery products sold in the form of bar goods, bagged items and boxed items, as well as grocery products in the form of baking ingredients, chocolate drink mixes, peanut butter, dessert toppings and beverages. Cadbury is a profitable business which several options for shareholder value increase available to it. Cadburys beta is 0.81 and the weighted average cost of capital (WACC) is 10.56%. A lease/buy opportunity for a packaging machine currently under examination by Cadbury executives has been analysed and the highest value lies in the outright purchase of the machines on offer. Using real option analysis we also recommend postponing the purchase of 10 new packing machines by six months. We recommend the acquisition of Mars Barz Pty Ltd at 15% premium to current share price which will represent significant vale accretive activity in the order of $1.57 per share. Applying some simple risk management tools for hedging FX and cocoa exposures would improve the volatility of EBIT. We recommend implementing an FX and cocoa hedge policy for the full book to reduce EBIT volatility by around 3-4%. We recommend a stable dividend policy be made public in the form of imputed cash dividends as opposed to rights issues would also assist in shareholder perception and align with general market conditions. The firms financial ratios are stable and healthy indicating that its raw beta is reasonably accurate. Cadburys WACC remains under pressure while debt levels rise and it may be prudent to issue equity in the next round of financing to improve the debt ratio of the firm. Cadburys corporate governance and executive compensation model is aligned with the general market however some unwanted risk remains on the balance sheet. We believe the above recommendations would improve the financial position of Cadbury and position the corporation for further growth.

INTRODUCTION Cadbury Australia is engaged, with its subsidiaries, in the manufacture, distribution and sale of confectionery and grocery products. The Company's principal product groups include confectionery products sold in the form of bar goods, bagged items and boxed items, as well as grocery products in the form of baking ingredients, chocolate drink mixes, peanut butter, dessert toppings and beverages. Cadbury manufactures confectionery products in a variety of packaged forms and markets them under more than 50 brands. The different packaged forms include various arrangements of the same bar products, such as boxes, trays and bags, as well as a variety of different sizes and weights of the same bar products, such as snack size, standard, king size, large and giant bars. The Company also manufactures and/or markets grocery products in the baking, beverage, peanut butter and toppings categories. Principal products in Australia include Cherry Ripe, Crunchie, Turkish Delight, Twirl, Flake, Picnic and Freddo Frog. Principal products in New Zealand include Pineapple Lumps, Chocolate Fish, Moro, Cadbury Jaffas and Pinky. Cadbury also make The Natural Confectionery Co lollies, Pascall lollies and Green & Blacks chocolate. The Company's products are sold primarily to grocery wholesalers, chain grocery stores, candy distributors, mass merchandisers, chain drug stores, vending companies, wholesale clubs, convenience stores, concessionaires and food distributors by full-time sales representatives, food brokers and part-time retail sales merchandisers throughout Australia and New Zealand. In 2009 sales to Woolworths and Coles-Myer and subsidiaries amounted to approximately 21% of Cadbury' total net sales. FIRM STRUCTURE AND CORPORATE GOVERNANCE On 27 February 2009 the confectionery and beverages businesses of Cadbury Schweppes Pty Ltd in Australia were formally separated and the beverages business began operating as Schweppes Australia Pty Ltd. In April 2009, Schweppes Australia was acquired by Asahi Breweries. The Board has established five main committees which, apart from routine matters, act primarily in a review or advisory capacity. These are the Related Party Committee, Nominations Committee, Audit & Risk Committee, Compensation Committee and the Compliance & Social Responsibility Committee. The composition of the Board at Cadbury is based on the following factors: the Chairman is a Non-Executive Director and is independent from the company the Group Managing Director is the Executive Director the company has nominated two Non-Executive Directors the majority of the Non-Executive Directors are independent one-third of the Board (other than the Group Managing Director) is required to retire at each AGM and may stand for re-election This practice complies with the general Corporate Governance practice advised by the ASX Corporate Governance Council. The Board recently established a Risk Management Policy which is claimed to formalise their approach to the oversight and management of material business risks. The policy is apparently

implemented through a top down and bottom up approach to identifying, assessing, monitoring and managing key risks across business units. Risks, and the effectiveness of their management, are reviewed and reported regularly to relevant management, the Audit & Risk Committee and the Board. The risk policy was implemented and noted in recent annual reports due to a breach in risk management practices in 2008. Refer to the 2008/09 Annual report for detail. REMUNERATION The six basic tools of compensation or remuneration are used at Cadbury to compensate executives. The six tools are: base salary short-term incentives, or bonuses long-term incentive plans (LTIP) benefits perquisites, or perks compensation protection The CEO and other main executives are paid salary plus short-term incentives or bonuses referred to as Total Cash Compensation (TCC). Short-term incentives are formula-driven and have some performance criteria attached. For example, the Marketing Director's performance related bonus is based on incremental revenue growth turnover and the CEO's is based on incremental profitability and revenue growth. The main executives are also compensated with a mixture of cash and shares of the company which are subject to vesting restrictions (a long-term incentive of 3-5 years). The vesting term refers to the period of time before the recipient has the right to transfer shares and realize value. Depending on the executive vesting can occur in two ways: Cliff vesting and Graded Vesting. In case of Cliff Vesting, everything that is due to vest vests at an instant in time. For graded vesting, partial vesting occurs at different times in the future. This is further sub-classified into two types: Uniform graded vesting (equal proportions vest each year for 5 years) and non-uniform graded vesting (different proportions vest each year for the next 5 years). Other components of an the standard executive compensation package include a generous retirement plan, health insurance and interest free loans for the purchase of housing. Some Executives are also compensated with restricted stock, which is stock given to an executive that cannot be sold until certain conditions are met and has the same value as the market price of the stock at the time of grant. The size of the performance factors are generally governed by four issues: the agents risk aversion translated into the size of fixed remuneration, the agents effort aversion (how much they are willing to commit to performance), the marginal impact of effort on performance (how their actions influence the outcome desired by the principal) and the noise in performance measure X (the extent to which X is a good measure of the outcome desired by the principal). Based on the average remuneration changes directly correlating with Cadbury EBIT for the past three years it is our belief that the second-best remuneration structure is the most efficient and therefore the compensation structure of Cadbury is adequate.

CAPITAL STRUCTURE The Corporation has two classes of stock outstanding, Common Stock and Class B Common Stock. Holders of the Common Stock and the Class B Stock generally vote together without regard to class on matters submitted to stockholders with the Common Stock having one vote per share and the Class B Stock having ten votes per share. However, the Common Stock, voting separately as a class, is entitled to elect one-sixth of the Board of Directors. With respect to dividend rights, the Common Stock is entitled to cash dividends 10 percent higher than those declared and paid on the Class B Stock. In December 2008, the Corporation's Board of Directors unanimously adopted a Stockholder Protection Rights Agreement. The Rights Agreement was supported by the Corporation's largest stockholder, the Milton Cadbury School Trust. This action does not appear to be in response to any specific effort to acquire control of the Corporation. Under the Rights Agreement, the Corporation's Board of Directors declared a dividend of one right for each outstanding share of Common Stock and Class B Stock payable to stockholders of record at the close of business on December 26, 2008. The issuance of the rights has no dilative effect, will not affect reported earnings per share, is not taxable and will not change the manner in which the Corporation's Common Stock is traded. It is our view that the primary driver of the rights issue was to deliver a dividend while retaining cash holdings for other purposes discussed further in this report. Financing activities over the past 2 years included debt borrowings and repayments, payments of dividends, the exercise of stock options, incentive plan transactions, and the repurchase of Common Stock. During the past three years, short-term borrowings in the form of commercial paper or bank borrowings were used to purchase Nabisco's mint and gum business, fund seasonal working capital requirements, and finance share repurchase programs. In our view this purchase could have been funded using retained earnings and cash reserves before deploying debt. This would maintain a debt-equity ratio at pre-takeover levels (42 percent) rather than push the level to 47 percent. This may heighten the risk of cost of capital increases. During the past three years, a total of 4,261,484 shares of Common Stock have been repurchased for $224.4 million. Cash used for incentive plan transactions of $274.7 million during the past three years was partially offset by cash received from the exercise of stock options of $141.1 million. The dividend policy of Cadbury does not appear to be aligned with its corporate objectives. Research into dividend policy has shown that a stable dividend policy and shareholder preference for imputation credits (see Brearly and Myers (2008)). Cadburys shareholder base would value a stable dividend policy higher than one based on issuing dividends in the form of cash or rights. It is also our view that Cadbury should maintain vanilla debt and equity products rather than issue convertible notes or similar instruments as it is of sufficient size and has a strong enough balance sheet to warrant more simple capital issues. CAPM BETA AND FACTOR MODEL ANALYSIS For capital rationing and project NPV calculations a suitable cost of capital is required. We derive a firm-wide cost of capital as the divisions of Cadbury are broadly similar. In computing the cost of equity, we use the Capital Asset Pricing Model and assume the market is represented by the

ASX/S&P500 index, which is the best representative market index for Australian stocks. Ten years of monthly returns from 1999 to 2009 are used in the analysis. A selection of monthly returns is provided below.
SP500
Date Jan-98 Feb-98 Mar-98 Apr-98 May-98 Jun-98 Jul-98 Aug-98 Sep-98 Oct-98 Nov-98 Dec-98 Closing Monthly price return 980.28 1.02% 1049.34 7.04% 1101.75 4.99% 1111.75 0.91% 1090.82 -1.88% 1133.84 3.94% 1120.67 -1.16% 957.28 -14.58% 1017.01 6.24% 1098.67 8.03% 1163.63 5.91% 1229.23 5.64% Date Jan-98 Feb-98 Mar-98 Apr-98 May-98 Jun-98 Jul-98 Aug-98 Sep-98 Oct-98 Nov-98 Dec-98

Cadbury
Closing Monthly price return 34.7979 8.53% 36.7636 5.65% 37.0093 0.67% 36.0760 -2.52% 36.6002 1.45% 40.4545 10.53% 41.2121 1.87% 38.1181 -7.51% 43.0066 12.82% 46.6969 8.58% 47.6904 2.13% 48.6840 2.08%

Table 1: Selection of monthly returns for market index and Cadbury 1998.

The cost of equity is computed using the analysis below. Cadburys beta is 0.8055 which is broadly similar to the AGSM published beta of 0.815. The corrected Bloomberg beta is 0.8716 (0.66 x 0.8055 + 0.34). We will rely on the internally computed beta for this analysis. The cost of equity as computed below using the CAPM is 11.17 percent and the tax-adjusted cost of equity is 10.82 percent assuming a real corporate tax rate of 40 percent (30 percent corporate tax plus a range of levies totalling a further 10 percent).
CAPM cost of equity calculations Cadbury's beta Classical CAPM cost of equity Risk premium Risk-free rate rE, the cost of equity Tax-adjusted CAPM Risk premium Risk-free rate Corporate tax Tax-adjusted SML slope rE, the cost of equity 0.8055 <-- =COVAR(C5:C124,G5:G124)/VARP(C5:C124)

8.40% <-- E(rM)-rf 4.40% <-- Treasury bill rate, end 1998 11.17% <-- =J9+J5*J8

8.40% <-- E(rM)-rf 4.40% <-- Treasury bill rate, end 1998 40% 10.16% <-- =J13+J15*J14 = E(rM)-rf *(1-TC ) 10.82% <-- =J14*(1-J15)+J5*J16

Table 2: Cost of equity for Cadbury using CAPM.

SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations ANOVA df Regression Residual Total SS MS F Significance F 1 0.1153 0.1153 59.40029 4.45119E-12 118 0.229045 0.001941 119 0.344345 Lower 95% Upper 95% Lower 95.0%pper 95.0% U 0.001798134 0.01864 0.001798 0.01864 0.598523239 1.012444 0.598523 1.012444

0.578652 0.334838 0.329201 0.044057 120

Intercept X Variable 1

Coefficients Standard Error t Stat P-value 0.010219 0.004252 2.403112 0.017814 0.805483 0.104511 7.707159 4.45E-12

Table 3: Regression of returns for Cadbury to compute beta.

Cadbury, Beta Calculation Monthly data 1999-09

25%

20%

y = 0.8055x + 0.0102 R = 0.3348

15%

10%

Abbott return

5%

0%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

-5%

-10%

-15%

S&P500 return

Figure 1: Scatter diagram of Cadbury vs ASX/S&P500 monthly returns 1999-2009.

Cadburys beta is less than unity indicating it is best suited for portfolios seeking defensive stocks. Compared to other retail companies a beta that is less than unity is rare. Cadburys main competitors include ZZZZ Corp which has a beta of 1.21, QQQQ Corp which has a beta of 1.07 and BBBB Corp which has a beta of 1.11. Fund managers looking to include a retail stock in a diversified portfolio should consider Cadbury and senior management and the board of directors should advertise the benefit of Cadbury stocks to a portfolio manager. For instance, an existing Australian

equities portfolio tracking a broad index of Australian firms generally has a beta in excess of 1.07, so adding Cadbury stock to comprise around 12 percent of the portfolio can reduce the portfolio beta to near 1. This would be of strategic importance over the business cycle. WACC ANALYSIS The weighted average cost of capital for Cadbury is provided in the analysis below. For the debt component the credit rating for Cadbury is A (Standard and Poors and Fitch) and A2 (Moodys) which is upper medium grade debt. This rating translates to a one-year default probability of 1.4 percent which in turn increases the cost of borrowing to around 170bp over the risk free rate. The relatively small amount of debt on Cadburys balance sheet means that the cost of equity dominates the full cost of capital. Thus the WACC used for Cadbury is 10.56 percent.

CALCULATING CADBURY'S WACC

Calculation of end-1998 market value of equity Number of shares, end 2009 Share price, end 2009 Market value of equity, end 2009, $billion 1,516,063,000 49.00 74.29

End-2009 value of debt (book value of debt assumed = market value) Long-term debt 1,339,694,000 Short-term debt and current portion of long-term debt 1,759,076,000 Total debt 3,098,770,000 Less cash and cash equivalents 308,230,000 Less investment securities 75,087,000 Net debt, $billion 2.72 Cost of debt Enterprise value = equity + debt, $billion % of equity % of debt Abbott's marginal tax rate COST OF CAPITAL CALCULATIONS Using Gordon model Cost of equity WACC Using the CAPM Cost of equity (Benninga-Sarig tax-adjusted SML) WACC 5.49% 77.00 <-- =B14+B6 0.96 <-- =B6/B18 0.04 <-- =1-B19 40%

13.40% 13.05% <-- =B19*B27+B20*(1-B22)*B16

10.82% 10.56% <-- =B19*B31+B20*(1-B22)*B16

Table 4: Cadbury WACC estimation.

PROJECT ANALYSIS Cadbury has been through the process of deciding to upgrade equipment at one of their manufacturing hubs. The cost of a new packaging machine is $540,000. If purchased the machine will be depreciated on a straight-line basis in accordance with FASB98 to a residual of zero. Machine estimated life is 6 years and company tax rate is assumed to remain at 30 percent. Westpac Banking Corporation has offered to lease the equipment to Cadbury for 6 years at $130,000 p.a. with an immediate payment upfront followed by five annual payments. There will be no residual under the lease.

Under the equivalent loan method the decision to buy the asset is clear, as per the analysis below.
EQUIVALENT LOAN METHOD
Asset cost Interest rate Lease rental payment Annual depreciation Tax rate Year 540,000 12% 130,000 90,000 30% 0 1 2 3 4 5 6

After-tax cash flows from leasing After-tax lease rental -91,000

-91,000

-91,000

-91,000

-91,000

-91,000

After-tax cash flows from buying the asset Asset cost -540,000 Depreciation tax shield 27,000 Net cash from buying -540,000 27,000 Differential cash flow Lease minus buy IRR of differential cash flow Decision??

27,000 27,000

27,000 27,000

27,000 27,000

27,000 27,000

27,000 27,000

449,000 11.13% Buy

-118,000

-118,000

-118,000

-118,000

-118,000

-27,000

<-- =IF(B22<(1-B7)*B4,"Lease","Buy")

Table 5: Equivalent loan method for Cadbury buy or lease proposition.

The highest acceptable lease payment is $120,231 as per the below analysis. This analysis shows a residual value of $27,000 that Cadbury can negotiate to settle with Westpac for a cash payment.
CALCULATING THE HIGHEST ACCEPTABLE LEASE PAYMENT
Asset cost Interest rate Lease rental payment Annual depreciation Tax rate After-tax interest rate Year 540,000 12% 120,231 <-- Computed with either Goal Seek or Solver 90,000 30% 8.40% 0 1 2 3 4 5 6

After-tax cash flows from leasing After-tax lease rental -84,162

-84,162

-84,162

-84,162

-84,162

-84,162

After-tax cash flows from buying the asset Asset cost -540,000 Depreciation tax shield 27,000 Net cash flow from buying -540,000 27,000 Differential cash flow Lease minus buy IRR of differential cash flow Decision??

27,000 27,000

27,000 27,000

27,000 27,000

27,000 27,000

27,000 27,000

455,838

-111,162

-111,162

-111,162

-111,162

-111,162

-27,000

8.40% <-- =IRR(B21:H21,0) Lease <-- =IF(B23<(1-B7)*B4,"Lease","Buy")

Table 6: Highest acceptable lease payment estimation for Cadbury buy or lease proposition.

If a residual value cannot be negotiated with the lessor then the analysis reveals in the following analysis that the best value will lie in purchasing the asset rather than leasing.
RESIDUAL VALUES IN LEASE ANALYSIS--Certainty equivalence factor
Asset cost Interest rate Lease rental payment Annual depreciation Tax rate Residual value CE factor Year 540,000 12% 121,048 90,000 Asset fully depreciated over 6 years 30% 100,000 Anticipated to be realized in year 7; fully taxed 0.7 Certainty-equivalence factor 0 1 2 3 4 5 6 7

After-tax cash flows from leasing After-tax lease rental -84,734

-84,734

-84,734

-84,734

-84,734

-84,734

After-tax cash flows from buying the asset Asset cost -540,000 Depreciation tax shield 27,000 After-tax residual Net cash flow from buying -540,000 27,000 Differential cash flow Lease minus buy IRR of differential cash flow Decision??

27,000 27,000

27,000 27,000

27,000 27,000

27,000 27,000

27,000 27,000 49,000 <-- =(1-B7)*B8*B9 49,000

455,266

-111,734

-111,734

-111,734

-111,734

-111,734

-27,000

-49,000

10.66% <-- =IRR(B23:I23,0) Buy <-- =IF(B25<(1-B7)*B4,"Lease","Buy")

Table 7: Highest acceptable lease payment estimation for Cadbury buy or lease proposition.

From the above analysis it is clear that Cadbury management should look to purchase the machine outright using retained earnings in the balance sheet. REAL OPTION ANALYSIS OF CAPITAL PURCHASE In discussion with senior executives a potential investment option has been presented to Cadbury with a decision pending. Using real options analysis to estimate the trade-off for a machine purchase opportunity, Cadbury has the opportunity to purchase 10 new packing machines. The manufacturer has granted Cadbury two options for the purchase. 1. Buying ten machines 2. Buying one machine now and the remaining nine in six months time. Each machine is expected to return the cash flows as specified below. Each machine costs $550,000. An appropriate discount rate for the machines is quoted by the CFO as 25 percent, as the investment will be funded externally and will therefore require a much higher discount rate than the WACC quoted above.

MACHINE REPLACEMENT
Year CF of single machine Discount rate for machine cash flows NPV of single machine Number of machines bought next year Option value of single machine purchased half a year from now NPV of total project Black-Scholes Option Pricing Formula S X r T Sigma d1 d2 N(d1) N(d2) Option value = BS call price 0 -550 1 100 2 200 3 300 4 400

25% <-- This is the risk-adjusted discount rate. -24.56 <-- Therefore you would not recommend buying just one machine. 10 45.43 <-- =B24 429.73 <-- =B7+B9*B10

525.44 550.00 10.00% 0.5 30% 0.1264

PV of machine CFs Exercise price = Machine cost Risk-free rate of interest Time to maturity of option (in years) <-- Volatility <-- (LN(S/X)+(r+0.5*sigma^2)*T)/(sigma*SQRT(T))

-0.0857 <-- d1 - sigma*SQRT(T) 0.5503 <--- Uses formula NormSDist(d1) 0.4658 <--- Uses formula NormSDist(d2) 45.43 <-- S*N(d1)-X*exp(-r*T)*N(d2)

Table 8: Real options analysis results for machine replacement opportunity buy now or postpose.

Using real options analysis via the Black-Scholes option pricing formula I conclude that the first option is out of the money as its NPV is negative, however the second option (to buy one immediately and a further 9 in six months time) is in the money and therefore the more valuable strategy. MERGERS AND ACQUISITIONS TARGETS / DIVESTITURES The two acquisition strategies open to Cadbury, in or view, are as follows: Horizontal where two competitors in the same line of business combine (the typical motive is to create economies of scale or scope, or to enhance market power) and vertical where two firms in different stages of the production process in a given industry combine. The general justification is to stabilize: (a) the supply of raw materials for a firm that is further down in the production process; or (b) customer demand for the finished product that is further up in the production process. The primary economic rationale for a possible take-over is that they it is a positive NPV investment. The value of Cadbury and the merged entity must be greater than the sum of its parts. Through combining operations we require V(AB) > V(A) + V(B) where V(AB) = the value of the combined firms A and B, V(A) = the pre-acquisition value of firm A and V(B) = the pre-acquisition value of firm B. The process synergy (or operating synergy) is as follows: Synergy = V(AB) - (V(A) + V(B)) A firm's intrinsic value is the sum of its future discounted cash flows. One or more of incremental cash flows, revenues, costs and taxes of the new entity must result from the takeover and increases cash flows and hence synergy, which would justify the takeover on economic grounds.

We have identified Mars Barz Pty Ltd as a potential takeover target for the following reasons: 1. Mars Barz has a dominant market share position in Tasmania where Cadbury have been trying (unsuccessfully) to penetrate in recent years. 2. Mars Barz owns its own distribution and retail network. 3. Mars Barz is under mild financial distress and has issued statements that it would be open to merger discussions. 4. Mars Barz has a relatively weak balance sheet which limits its ability to fight a takeover offer. 5. Mars Barz has a similar working culture to Cadbury which would allow it to merge operations relatively easily. There are some reasons against a possible takeover which include: 1. Brand loyalty is confined to Tasmania so the brand has limited scope in Cadburys existing markets. 2. Mars Barz is majority owned by Mr Steven Strop who acts as CEO and Chairman and has had control of the company operations for over 25 years. Mr Strop is unlikely to sell for a price less than 15 percent premium to current market price.
Input Buyer Ticker Input Target Ticker Assumptions Transaction Date Percentage Acquired Range of Premiums Tax Rate Percentage Cash Interest Rate on Debt Interest Rate on Cash Use Excess Cash? (Y/N) Use Excess Cash from Target? (Y/N) Fees & Expenses (mm) Amort. of Finite Intangibles (% ) Amort. of Finite Intangibles (Yrs.) Input Buyer (Cadbury) Currency Input Target (CAD) Currency 29/03/2011 100.0% 15.0% 30.0% 100.0% 100.0% 8.0% 3.0% Y Y 15.0 5.0% 10 AUD AUD

Cadbury CAD

Cadbury EPS Shares Outstanding Net Income

Dec-09 A 0.08 264.7 20.4

Fiscal Year Ending Dec-10 E Dec-11 E 0.76 0.76 264.7 264.7 200.0 200.0 Fiscal Year Ending Jun-11 E Jun-12 E 0.20 0.41 492.4 492.4 99.8 200.5 Dec-10 E 0.22 492.4 107.3 Dec-11 E 0.31 492.4 150.3

Dec-12 E 0.76 264.7 200.0

LT Growth Rate 0.00%

FY+2 Method Consensus Est.

Mars Barz EPS Shares Outstanding Net Income 40.0% Mars Barz (Calendarized) EPS Shares Outstanding Net Income

Jun-10 A 0.24 478.1 114.9

Jun-13 E 0.58 492.4 286.4

LT Growth Rate 20.64%

FY+2 Method Consensus Est.

Mars Barz financials adjusted to match Cadbury's year end

Table 9: Mars Barz takeover data assumptions.

The input data is provided in Table 9. Summary statistics for takeover are given in Table 10.

SUMMARY PRO FORMA STATISTICS

Cadbury buys 100% of Mars Barz Transaction Consideration is 100% Cash and 0% Stock Cadbury stock price (as of 01/12/10) Mars Barz stock price (as of 01/12/10) Acquisition Price Acquisition Premium Current Fiscal Year Ending EPS Accretion/(Dilution) % Pre-tax Synergy Required for Breakeven Next Fiscal Year Ending EPS Accretion/(Dilution) % Pre-tax Synergy Required for Breakeven Pro Forma for Cadbury % Held by Shareholders of Cadbury % Held by Shareholders of CAD Exchange Ratio Acquisition Price/Current Year EPS Implied TEV/Current Year Sales Implied TEV/Current Year EBITDA Pro Forma Total Debt Pro Forma Cash Balance Pro Forma Net Debt Pro Forma EBITDA (Cadbury's current fiscal year) Pro Forma Total Debt/Pro Forma EBITDA Pro Forma Net Debt/Pro Forma EBITDA Pro Forma EBITDA/Interest Expense 100.0% 0.0% 0.7x 38.3x 6.2x 21.0x 6,117.6 127.2 5,990.4 836.0 7.3x 7.2x 1.7x 100.0% 0.0% 0.7x 39.6x 6.4x 21.8x 6,255.9 127.2 6,128.7 836.0 7.5x 7.3x 1.7x 100.0% 0.0% 0.8x 41.0x 6.7x 22.5x 6,394.2 127.2 6,267.0 836.0 7.6x 7.5x 1.6x 100.0% 0.0% 0.8x 42.4x 6.9x 23.3x 6,532.5 127.2 6,405.2 836.0 7.8x 7.7x 1.6x 100.0% 0.0% 0.8x 43.8x 7.1x 24.1x 6,670.8 127.2 6,543.5 836.0 8.0x 7.8x 1.6x 100.0% 0.0% 0.8x 45.2x 7.4x 24.8x 6,809.1 127.2 6,681.8 836.0 8.1x 8.0x 1.5x 100.0% 0.0% 0.9x 46.6x 7.6x 25.6x 6,947.3 127.2 6,820.1 836.0 8.3x 8.2x 1.5x 10.96 6.74 7.75 15.0% Dec-10 -55.2% 157.7 Dec-11 -30.5% 87.3 -34.7% 99.0 -38.8% 110.8 -42.9% 122.5 -47.0% 134.3 -51.1% 146.0 -55.2% 157.8 -59.3% 169.5 -63.4% 181.2 -67.5% 193.0 -71.7% 204.7 -75.8% 216.5 -79.9% 228.2 8.03 19.2% 8.31 23.3% 8.59 27.5% 8.87 31.7% 9.16 35.8% 9.44 40.0%

Table 10: Acquisition premium scenarios for Mars Barz takeover.

Table 11 illustrates an analysis of the merged entity at various prices.

ANALYSIS AT VARIOUS PRICES

Target Mars Barz stock price (as of 01/12/10) Price/Share Premium Market Cap Enterprise Value TEV/ REV Last Year TEV/ REV Current Year TEV/ REV Next Year TEV/ EBITDA Last Year TEV/EBITDA Current Year TEV/EBITDA Next Year PE Last Year PE Current Year PE Next Year P/BV 6.74 0.0% 3,327.2 3,281.1 8.1x 5.4x 4.2x 36.0x 18.2x 10.1x 28.0x 33.3x 16.6x 3.3x

Buyer
6.74 7.75 15.0% 3,826.3 3,780.2 9.3x 6.2x 4.9x 41.5x 21.0x 11.6x 32.3x 38.3x 19.0x 3.7x 8.03 19.2% 3,964.9 3,918.8 9.63x 6.4x 5.1x 43.0x 21.8x 12.0x 33.4x 39.6x 19.7x 3.9x 8.31 23.3% 4,103.5 4,057.4 10.0x 6.7x 5.2x 44.6x 22.5x 12.4x 34.6x 41.0x 20.4x 4.0x 8.59 27.5% 4,242.2 4,196.1 10.3x 6.9x 5.4x 46.1x 23.3x 12.9x 35.8x 42.4x 21.1x 4.1x 8.87 31.7% 4,380.8 4,334.7 10.7x 7.1x 5.6x 47.6x 24.1x 13.3x 36.9x 43.8x 21.8x 4.3x 9.16 35.8% 4,519.4 4,473.3 11.0x 7.4x 5.8x 49.1x 24.8x 13.7x 38.1x 45.2x 22.5x 4.4x 9.44 40.0% 4,658.1 4,612.0 11.3x 7.6x 6.0x 50.6x 25.6x 14.1x 39.3x 46.6x 23.2x 4.6x Cadbury 10.96 N/A 2,901.5 5,121.4 2.4x 2.4x 2.4x N/A 7.3x 7.3x 142.2x 14.5x 14.5x 3.5x

Table 11: Acquisition premium scenarios for Mars Barz takeover at various premiums.

Table 12 provides a detailed analysis of the main outcomes of the takeover analysis. As shown it funded through debt the takeover would not be value accretive however significant value can be derived if funded through current retained earnings. This would deplete Cadburys cash reserves however it still has capacity to raise funds in the short term debt market for working capital requirements.

DETAILED PRO FORMA STATISTICS

Cadbury buys 100% of Mars Barz Transaction Consideration is 100% Cash and 0% Stock Cadbury stock price (as of 29/03/11) CAD stock price (as of 29/03/11) Acquisition Price Acquisition Premium Buyer Equity Issued Buyer Cash Paid Balance Sheet Cash Target Balance Sheet Cash Balance Sheet Cash Used Target Balance Sheet Cash Used Debt Issued Equity Purchase Price Buyer Shares Issued Current Fiscal Year Ending (12/31/10) Buyer Net Income Target Net Income Incremental Interest Expense Forgone Interest Income Amortization of Finite Intangibles Fees & Expenses Tax Impact Pro Forma Combined Net Income Pro Forma Shares Outstanding Pro Forma EPS EPS Accretion/(Dilution) Price/Share EPS Accretion/(Dilution) % Pre-tax Synergy Required for Breakeven Next Fiscal Year Ending (12/31/11) Buyer Net Income Target Net Income Incremental Interest Expense Forgone Interest Income Amortization of Finite Intangibles Tax Impact Pro Forma Combined Net Income Pro Forma Shares Outstanding Pro Forma EPS EPS Accretion/(Dilution) Price/Share EPS Accretion/(Dilution) % Pre-tax Synergy Required for Breakeven 10.96 6.74 7.75 15.0% 0.0 3,816.6 453.1 141.0 346.2 120.7 3,349.7 3,816.6 0.0 200.0 107.3 (268.0) (14.0) (9.8) (15.0) 89.1 89.6 264.7 0.34 (0.42) -55.2% 157.7 200.0 150.3 (268.0) (14.0) (9.8) 80.4 138.9 264.7 0.52 (0.23) -30.5% 87.3 8.03 19.2% 0.0 3,954.9 453.1 141.0 346.2 120.7 3,488.0 3,954.9 0.0 200.0 107.3 (279.0) (14.0) (10.3) (15.0) 92.4 81.4 264.7 0.31 (0.45) -59.3% 169.5 200.0 150.3 (279.0) (14.0) (10.3) 83.7 130.7 264.7 0.49 (0.26) -34.7% 99.0 8.31 23.3% 0.0 4,093.2 453.1 141.0 346.2 120.7 3,626.3 4,093.2 0.0 200.0 107.3 (290.1) (14.0) (10.7) (15.0) 95.7 73.1 264.7 0.28 (0.48) -63.4% 181.2 200.0 150.3 (290.1) (14.0) (10.7) 87.0 122.5 264.7 0.46 (0.29) -38.8% 110.8 8.59 27.5% 0.0 4,231.5 453.1 141.0 346.2 120.7 3,764.6 4,231.5 0.0 200.0 107.3 (301.2) (14.0) (11.2) (15.0) 99.1 64.9 264.7 0.25 (0.51) -67.5% 193.0 200.0 150.3 (301.2) (14.0) (11.2) 90.3 114.2 264.7 0.43 (0.32) -42.9% 122.5 8.87 31.7% 0.0 4,369.8 453.1 141.0 346.2 120.7 3,902.8 4,369.8 0.0 200.0 107.3 (312.2) (14.0) (11.7) (15.0) 102.4 56.7 264.7 0.21 (0.54) -71.7% 204.7 200.0 150.3 (312.2) (14.0) (11.7) 93.7 106.0 264.7 0.40 (0.36) -47.0% 134.3 9.16 35.8% 0.0 4,508.0 453.1 141.0 346.2 120.7 4,041.1 4,508.0 0.0 200.0 107.3 (323.3) (14.0) (12.2) (15.0) 105.7 48.5 264.7 0.18 (0.57) -75.8% 216.5 200.0 150.3 (323.3) (14.0) (12.2) 97.0 97.8 264.7 0.37 (0.39) -51.1% 146.0 9.44 40.0% 0.0 4,646.3 453.1 141.0 346.2 120.7 4,179.4 4,646.3 0.0 200.0 107.3 (334.4) (14.0) (12.7) (15.0) 109.0 40.2 264.7 0.15 (0.60) -79.9% 228.2 200.0 150.3 (334.4) (14.0) (12.7) 100.3 89.5 264.7 0.34 (0.42) -55.2% 157.8

Table 12: Acquisition value analysis for Mars Barz takeover.

A suitable plan for acquisition would therefore be to provide an all cash offer at 15 percent premium to current price of $6.74 (offer at $7.75) with a three-month acceptance window with compulsory acquisition of remaining shares upon 90 percent completion. The offer should be funded from retained earnings and existing cash reserves. This will be value accretive to Cadbury in the order of $1.57 per Cadbury share. RISK MANAGEMENT AND HEDGE POLICY ANALYSIS Cadbury operates an Enterprise Risk Assessment process, facilitated by the Companys Chief Risk Officer, to identify, manage and report on the Companys material business risks. The ERA process comprises five sub-ERAs conducted annually, with a semi-annual review, under the stewardship of each executive manager and their particular area of responsibility (Corporate Affairs, Finance, Marketing, Operations and Strategy & Development). Upon completion of the five sub-ERAs, a consolidated, prioritised and summarised ERA is prepared and tabled at the Audit & Risk Committee. During the year, a new specialised risk-management software package from Canadian company Dyadem International Ltd was introduced. The Dyadem software is now at the heart of risk assessments across the Group. An important benefit of the new software is that it now interfaces into a Pulse Actions Required module to assist in managing the timely completion of Recommended Controls. (Pulse is the Groups accounting and enterprise reporting system.) The ERA process is

supported by each production facility with each preparing an individual Facility Business Risk Assessment as part of their annual budgeting process. These are also facilitated by the Chief Risk Officer using the same Dyadem software and Pulse interface. FBRAs are tabled in support of annual budgets as part of the budget review process conducted with Senior Management in advance of the annual budget being tabled for adoption by the Board. Cadbury pursues a limited hedging policy aimed at partially mitigating only FX rates. However Cadbury has large exposures to cocoa, sugar and diesel prices for its manufacturing and distribution network. Cadbury has suffered reasonable losses due to rising prices in recent years. It is our belief that the executive engage the services of a trading team at a major bank to construct a combined FX, sugar, cocoa and diesel fuel hedge to offset major sources of risk to its cash flows from operations. Cocoa prices have steadily increased over the past 5 years placing price pressures on Cadburys retail arm. Historical cocoa prices are given in figure 2.

Cocoa beans - Monthly Price Commodity Prices Value

4,000.00 3,500.00 3,000.00 2,500.00 2,000.00 1,500.00 1,000.00 500.00 0.00

Feb-06

Feb-07

Feb-08

Feb-09

Figure 2: Cocoa futures prices 2006-2011.

The tripling of price and the increase in AUD against other major currencies is having a large affect on Cadburys EBIT. Simple sensitivity analysis suggests that a 1% change in cocoa prices translates into a 4% change in EBIT while a 1% change in AUD translates into a 2.7% change in EBIT. Hedging against both cocoa and FX would significantly reduce this risk.

Feb-11

Feb-10

Jun-06

Jun-08

Jun-09

Oct-06

Oct-07

Oct-08

Oct-09

Jun-10

Jun-07

Oct-10

Underlying vs Hedge (Cocoa) 300 200

Hedge ($ million)

100 -300 -100 -100 y = -1.0945x R = 0.9484 -200 -300 Underlying ($ million) 100 300

Figure 3: Hedge analysis for cocoa exposure 2007-2009.

Based on simple hedge analysis we estimate that the full book of exposure to cocoa of $120m p.a. could be hedged at a price of $3,304/t which would alleviate some price pressures. Combining a hedge against cocoa with an FX hedge would result in the estimate in Figure 3 which shows a strong correlation between AUD, Cocoa and EBIT exposures. Sugar and diesel, while volatile, do not contribute the same level of volatility to EBIT (see Annual report 2008 note 12b). Therefore we recommend implementing a hedge on two out of the four main commodity exposures. ANALYSIS OF BALANCE SHEET ASSETS Total assets increased $233.1 million, or 7%, as of December 31, 2009, primarily as a result of higher cash and cash equivalents, prepaid expenses and other current assets, and other non-current assets, partially offset by lower deferred income taxes, inventories, property, plant, and equipment, and goodwill. Current assets increased by $96.1 million, or 8%, principally reflecting increased cash and cash equivalents, prepaid expenses and other current assets, substantially offset by a decrease in deferred income taxes. Property, plant and equipment was lower than the prior year primarily due to depreciation expense of $155.4 million and the retirement of property, plant and equipment of $19.0 million, partially offset by capital additions of $132.7 million. The decrease in goodwill primarily reflected the impact of the sale of certain confectionery brands to Farley's & Sather's and foreign currency translation. LIABILITIES Total liabilities increased by $8.6 million, as of December 31, 2009, primarily reflecting a reduction in accrued liabilities, partially offset by an increase in deferred income taxes. The decrease in accrued liabilities was principally the result of lower pension liabilities resulting from the funding in 2009 and a decrease in enhanced employee benefits and other liabilities associated with business realignment

initiatives recorded in the fourth quarter of 2008. The increase in total current and non-current deferred income taxes was primarily associated with the impact of the tax effect on other comprehensive income and the pension funding, respectively COMMON-SIZED ANALYSIS Current Year Previous year 8.55% 4.13% 10.87% 11.96% 42.69% 47.26% 1.19% 1.2% 8.98% 3.6% 100% 100% 15.7% 18.67% 60.58% 64.67% 39.41% 35.32%

Current assets Goodwill Fixed assets Other Intangible assets Other assets Total assets Current liabilities Total liabilities Stockholder equities

Most ratios remain steady. ANALYSIS OF INCOME STATMENT Net sales decreased $16.9 million from 2008 to 2009, primarily as a result of increased promotion costs and returns, discounts, and allowances, the divestiture of the XXX brands in 2009 and the YYY throat drop business in 2008, and the timing of sales related to the gum and mint business acquired from Nabisco Inc. ("Nabisco"), which resulted in incremental sales in 2008 compared with 2009. A sluggish retail environment, characterized by the bankruptcies and store closings of certain customers, also contributed to the lower sales. Sales were also lower in several international markets. Cost of sales decreased $107.5 million, or 4%, from 2008 to 2009. Cost of sales in 2009 included $6.4 million of costs primarily related to the relocation of equipment associated with the Corporation's business realignment initiatives. Cost of sales in 2008 included $50.1 million associated with business realignment initiatives recorded in the fourth quarter of that year. Gross margin increased from 35.5% in 2008 to 37.8% in 2009. Gross margin in 2008 was negatively impacted 1.2 percentage points from the inclusion in cost of sales of a charge of $50.1 million associated with business realignment initiatives recorded during the fourth quarter of that year. Net interest expense for 2009 was $8.4 million below the prior year, primarily as a result of a decrease in short-term interest expense due to reduced average short-term borrowings. Net interest expense for 2008 was $6.9 million below 2007 reflecting a decrease in short-term interest expense due to a decrease in average short-term borrowing rates and reduced average short-term borrowings. Net income increased $196.4 million from 2008 to 2009. Excluding the after-tax effect of the business realignment initiatives in 2009 and 2008, the after-tax effect of incremental expenses to explore the possible sale of the Corporation in 2009 and the after-tax gain on the sale of the YYY throat drops business in 2008, net income increased $44.5 million or 11%.

COMMON-SIZE ANALYSIS X Revenue COGS SG&A Interest expense Income taxes Net income Current year Previous year 100% 100% 62.15% 64.50% 20.22% 20.47% 1.47% 1.6% 5.6% 3.3% 9.8% 5%

ANALYSIS OF CASH FLOW STATEMENT Cash flow Activity Operating Investing Financing Increase in cash Beginning cash balance Ending cash balance Current year Previous year 625,343 706,405 132,572 123,987 329,175 480,240 163,595 102,178 134,14 731,969 197,743 134,147

Over the past three years, cash from operating activities provided approximately $1.8 billion. Over this period, cash used by or provided from accounts receivable and inventories has tended to fluctuate as a result of sales during December and inventory management practices. Cash provided from inventories was principally associated with a reduction of raw material inventories in December 2008 as part of the Corporation's business realignment initiatives. The change in cash required for or provided from other assets and liabilities between the years was primarily related to hedging transactions, the timing of payments for accrued liabilities, including income taxes, and variations in the funded status of pension plans. Investing activities included capital additions, capitalized software additions, business acquisitions and divestitures. Capital additions during the past three years included the purchase of manufacturing equipment, and expansion and modernization of existing facilities. Capitalized software additions over the past three years were associated primarily with the ongoing enhancement of information systems. ANALYSIS OF RETURN OPERATING RETURN AVERAGE STAOCKHOLDERS' EQUITY The Corporation's operating return on average stockholders' equity was 34.6% in 2009. Over the most recent six-year period, the return has ranged from 28.9% in 1999 to 37.6% in 1998. For the purpose of calculating operating return on average stockholders' equity, earnings is defined as net income adjusted to reflect the impact of the elimination of the amortization of intangibles for all years and excluding the after-tax effect of incremental expenses to explore the possible sale of the Corporation in 2009, the after-tax effect of the business realignment initiatives in 2009 and 2008, and the after-tax gains on the sale of the Luden's throat drops business in 2008, the sale of corporate aircraft in 2007, and the sale of the pasta business in 1999. OPERATING RETURN ON AVERAGE INVESTED CAPITAL

The Corporation's operating return on average invested capital was 19.7% in 2009. Over the most recent six-year period, the return has ranged from 15.4% in 1999 to 19.7% in 2009. Average invested capital consists of the annual average of beginning and ending balances of long-term debt, deferred income taxes and stockholders' equity. For the purpose of calculating operating return on average invested capital, earnings is defined as net income adjusted to reflect the impact of the elimination of the amortization of intangibles for all years and excluding the after-tax effect of incremental expenses to explore the possible sale of the Corporation in 2009, the after-tax effect of the business realignment initiatives in 2009 and 2008, the after-tax gains on the sale of the Luden's throat drops business in 2008, the sale of corporate aircraft in 2007, and the sale of the pasta business in 1999, and the after-tax effect of interest on long-term debt. FINANCIAL CONDITION The Corporation's financial condition remained strong over the period 2007-09. The capitalization ratio (total short-term and long-term debt as a percent of stockholders' equity, short-term and longterm debt) was 39% as of December 31, 2009, and 44% as of December 31, 2008. The ratio of current assets to current liabilities was 2.3:1 as of December 31, 2009, and 1.9:1 as of December 31, 2008. In June 2009, the Corporation completed the sale of certain confectionery brands to Farley's & Sather's for $12.0 million in cash as part of its business realignment initiatives. In July 2008, the Corporation's Brazilian subsidiary, Cadbury do Brazil, acquired the chocolate and confectionery business of Visagis for $17.1 million. RATIO ANALYSIS Ratio Receivable turnover: Inventory turnover Current ratio Quick ratio Debt to total assets Current year 11.25 5.05 2.31 1.22 0.61 Previous year 10.98 5.01 1.92 1.21 0.64 Comment No big change No big change No big change No big change No big change

OUTLOOK The Corporation has set balanced long-term goals, including: three to four percent revenue growth; continued gross margin expansion; nine to eleven percent growth in earnings per share; improvement in returns on invested capital and continued market share gains. In December 2009, the Corporation announced an increase of approximately 11% in the price of standard-size candy bars effective January 1, 2003, representing an average increase of 3% over the entire domestic product line. Sales volume growth in 2003 is expected to be somewhat lower than the Corporation's long-term goal as a result of the price increase and sales growth in the first quarter of 2003 will be lower as a result of the buy-in in the fourth quarter of 2009. Commodity costs are anticipated to be relatively stable in 2010 as a result of recommended forward purchasing and hedging practices. The Corporation plans to achieve earnings per share growth of nine to eleven percent in 2010 from its operating performance and execution of its share repurchase program, as discussed below. Profitability in future periods is affected by various factors, including sales volume, selling prices, raw material and logistics costs, manufacturing efficiencies and the mix

of products sold in any period. Cocoa market prices rose sharply during 2009 and this increase accelerated following a rebellion in the world's largest cocoa producing country, the Ivory Coast. Continued civil unrest in the Ivory Coast could result in further cocoa price increases. The Corporation's costs during 2010 and beyond will not necessarily reflect market price fluctuations because of its forward purchasing practices, premiums and discounts reflective of relative values, varying delivery times, and supply and demand for specific varieties and grades of cocoa beans. Net cash provided from operating activities is expected to exceed cash requirements for capital additions, capitalized software additions and anticipated dividend payments. The Corporation announced on December 12, 2009, that it is authorized to acquire up to $500 million of the Corporation's Common Stock in open market or through privately negotiated transactions. This authorization is expected to be completed within approximately 12 months, subject to trading liquidity, and will be funded by cash provided from operations and short-term borrowings. CONCLUSION Cadbury is a profitable business which several options for shareholder value increase available to it. Along with the lease and real option analysis, the possible acquisition of Mars Barz Pty Ltd represents significant vale accretive activity in the order of $1.50-2.00 per share. Applying some simple risk management tools for hedging FX and cocoa exposures would improve the volatility of EBIT. A stable dividend policy in the form of imputed cash dividends as opposed to rights issues would also assist in shareholder perception and align with general market conditions. The firms financial ratios are stable and healthy indicating that its raw beta is reasonably accurate. Cadburys WACC remains under pressure while debt levels rise and it may be prudent to issue equity in the next round of financing to improve the debt ratio of the firm. Cadburys corporate governance and executive compensation model is aligned with the general market however some unwanted risk remains on the balance sheet, see Section 1. REFERENCES Brealey, R.A. & Myers, S.C. 2008, Corporate Finance: Capital Investment and Valuation, McGraw Hill, Washington. Cadbury Annual Report 2008 Cadbury Annual Report 2009 Cadbury Annual Report 2010