Case study: Kraft takeover of Cadbury

The takeover of Cadbury by US food and beverages company Kraft, generated a great deal of emotional outpouring by its workers and the media. Alex Miller cuts through the tension to analyse what the deal really meant

This article was written at the time of the Kraft takeover of Cadbury in 2010.

Contrary to popular opinion, Cadbury’s fate was not sealed in the few months as predator company Kraft doggedly pursued Cadbury until it could no longer fend off unwanted advances. You actually need to look back several years prior to this, to when billionaire investor-come-activist shareholder Nelson Peltz got involved with the UK chocolate producer.

Before Peltz began agitating the Cadbury management into life, he considered Cadbury to be a directionless conglomerate; albeit one which included a healthy confectionery operation, candy business and Cadbury Schweppes, its beverages operation.

So the American set out to wake up a sleepy management team, seemingly interested in just retaining the status quo. As a result, he became a constant thorn in the side of the Cadbury management.

More focused operation

In his position as head of Trian investment group, Peltz said he was not going to simply settle for ‘sleepy’ and promised he would deliver value and focus for the Cadbury shareholders.

Pretty soon afterwards, Cadbury seemed to get active. It sold off its North American beverage business and began to become a much more focused operation.

It was at this point, when the perception of the company altered, that Cadbury began to come under the scrutiny of potential buyers.

So although the deal by Kraft, the maker of products including Philadelphia cream cheese and Oreo biscuits, to acquire Cadbury for 850p a share (valuing the company at £11.5bn) was completed after a drawn out five-month battle, the non-overt interest in Cadburys had been ongoing for much longer.

60-day city code

The five months it took Kraft to rubber-stamp the Cadbury deal is a moot point though. The Cadbury buy out has added fuel to the many who have become concerned about the ‘telescoping’, or rather the lengthening of the 60-day city code, which states buy-outs should be completed within two months. Cadbury chairman Roger Carr even spoke publicly on the issue just after the Kraft deal was completed.

Overhauls could now be made to halt the ‘phony wars’ and leaks to the press, which see mergers and acquisitions informally extended. It was said Cadbury was paying £2m a day in advising fees to defend itself against Kraft’s advances. Clearly, it couldn’t continue to bleed money like that forever.

Parity between predators and prey

‘An overhaul of the city code needs to take place to ensure that there is parity between predator companies and prey. What we don’t want is a situation where one party has an unfair advantage over the other,’ says Jeremy Batstone-Carr, head of research at city analyst Charles Stanley.

Kraft made its first indicative offer in September 2009 at 745p, but this was lambasted by Roger Carr, as being ‘derisory’. He also called Kraft a ‘low-growth conglomerate’ and went on to urge shareholders not to let it ‘steal your company’.

Of the successful offer of 850p made in January 2010, 500p was in cash and the remainder in stock, at 0.1874 of a Kraft share for every Cadbury share. Kraft initially offered 300p in cash, and later sweetened it to 360p. The value of the increased offer was 840p, plus a 10p a share special dividend.

Kraft said that holders of 71.7% of Cadbury shares had accepted its final offer, sufficient for it to take control of the Birmingham-based manufacturer and create a company with global sales of $50bn in 160 countries.

Following the acquisition, the future of the Cadbury operation going forward has been open to discussion.

Kraft was understood to carry debts in the region of £22bn and Warren Buffett, a major Kraft shareholder, warned during negotiations, of the risks to Kraft if it overpaid for Cadbury.

The US company wanted to make substantial savings and exercise cost‑cutting measures within the Cadbury operation. It even issued a figure of $1.3bn in restructuring costs.

And while the future of the Cadbury brand looks secure enough, the Cadbury operations in the UK and west seem open to the biggest changes. There are a raft of lower cost manufacturing countries with cheaper wages and costs associated. Cadbury employs 4,400 staff in the UK and alongside other western jobs, they do seem the most likely to be considered.

Within days of the Kraft acquisition being confirmed, a UK-based Cadbury factory in Bristol was closed, putting 400 jobs under scrutiny.

Too far down the road

Cadbury had spent £100m building manufacturing facilities in Poland and intended moving the operation there, even before the acquisition. Kraft said it felt the move was too far down the road to halt.

This is unlikely to be the last such move though. Look back to 1993, when Kraft acquired Terry’s chocolate and vowed not to close its York headquarters. However, it did eventually sell the building in 2005 – and moved production to Poland.

Kraft is also extremely eager to find substantial opportunities for speedy revenue growth in the emerging markets of India, Asia and South America. Cadbury really put down its flag in countries such as India – where its sugar-coated chocolate products are very popular. Cadbury has strong links in all these markets and Kraft will look to generate business and revenues and grow strongly there.

Emerging markets

These emerging markets are absolutely critical for the long-term aspirations of Kraft. Within the new company, there is certainly a powerful range of iconic products and brands including Kenco, Terry’s Chocolate Orange, Dairylea and Toblerone. The general feeling from the city is that despite Warren Buffett’s fears, the price paid for Cadbury was fair.

Following upbeat trading reports from Cadbury during negotiations, it looked like Kraft may have had to pay more like £10 a share. ‘In the end, it could be said that the Cadbury executives caved in rather meekly. Maybe their remuneration had something to do with it; but had these executives defended their updates more vigorously, the story of Cadbury may have been different’, adds Batstone-Carr.


 

 

"An overhaul of the city code needs to take place to ensure that there is parity between predator companies and prey. What we don’t want is a situation where one party has an unfair advantage over the other"