Kraft wants to eat Cadbury for $16.7 billion

Kraft, which is the number two food company, made a $16.7 billion offer for rival Cadbury, which rejected the bid. But this is no deterrent. Kraft isn't going to give up on its pursuit.

All in all, the deal makes sense. To grow in the brutally competitive food space means getting scale -- in terms of product offerings and distribution. So by adding Cadbury, Kraft will certainly get lots of scale. In fact, the combined entity would control about 15% of the global confectionery market. Last year, Cadbury generated roughly $8.8 billion in sales (this compares to about $42 billion for Kraft).

OK, so what's the problem here? Well, the deal is likely to get expensive. Keep in mind that last year's deal between Mars and Wrigley came to a nose-bleed 19.5 times cash flows.

Also, since Cadbury is now "in play," there could be rival bids, such as from Nestle, Hershey (NYSE: HSY), or Mars.

In other words, the ultimate valuation could be 10% to 20% higher than Kraft's current bid. But, when it comes to buying mega global brands, there is no alternative but paying top dollar.

Tom Taulli is the author of various books, including The Complete M&A Handbook.