The scramble for a king-size block of Cadbury PLC [CBRY.LSE] by Kraft Foods Inc [KFT.NYSE] fascinates me. I love business and investing but I have to confess also to be somewhat of a chocoholic - doctor it has been 3 minutes since my last bite. In a protracted bid that has been going since a formal offer by Kraft was made in November 2009 after it telegraphed interest in the Dairy Milk maker in September the takeover process has been full of harsh words, threats, finger pointing and egos from all sides of the chocolate vat.
Since then Kraft has been rebuffed twice by Cadbury and those harsh words have been flowing like Cadbury Creme eggs between the CEO'S of Kraft and its sweet milky target Cadbury. Meanwhile Kraft's biggest shareholder, Warren Buffett, has issued a press release urging Kraft not to pay too much for the company.
In this sickly mix of nuts and fruits comes interest from just about every major chocolate company in the world. Ferrero Rocher, Nestle', and Hershey have all been on the radar but all seem to have been dismissed as having short pockets or not serious, save for Hershey which seems to be mulling over a formal bid of its own according to some sources.
The problem for Kraft is that Cadbury contend that its shares are worth more than what they are offering and Kraft's bid significantly undervalues the long-term prospects of the company and they will have to increase their bid before the January 19 deadline if they want to take a chip off the Cadbury block.
I have to agree with Cadbury. The company has a strong presense in most parts of the world and its brand and products - no matter what some might think of its sweet milky almost chocolate free taste - dominate the minds of consumers and their sweet ways when they make a decision to buy a quick convenient snack.
This brand awareness has made Cadbury one of the worlds most successful chocolate makers in the past and that is unlikely to change any time soon.
For these reasons alone Kraft need to raise their offer and any other company considering a move on Cadbury must also take into account the company and its fine pedigree.
Warren Buffett, as a 10% holder of Kraft stock, was against Kraft's bid principally because of its intention to issue new shares in Kraft to help pay for the purchase. I have just been reading Warren Buffett on Business: Principles from the Sage of Omaha, a collection of Warren Buffett's letters to Berkshire Hathaway shareholders and he makes it very clear in a number of his letters that he is against the dilutionary effects of such transactions for the predator company if it doesn't present value for the predator. Of course the price paid for the company is a key factor as well and if the price is right for the takeover then the preferred option of purchase for Buffett is cash and preferably non -borrowed cash at that.
Cadbury would be a great company to own. Good cash flows, strong brands with a competitive moat and profit to boot.
Any suitor will have to pay a premium to take control of the purple one and Buffett has stressed he doesn't want Kraft to be that suitor but if he wants a piece of it - and I think he does - then Kraft and any other buyers are going to have to sweeten the deal beyond the current valuations put on Cadbury's assets.
I cant wait for the next move!
Cadbury @ Share Investor
Cadbury could learn a thing or two from 1980's Coca Cola Experiment
Related Amazon Reading
Cadbury's Purple Reign: The Story Behind Chocolate's Best-Loved Brand by John Bradley
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c Share Investor 2010
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Cadbury does not want to be taken over by a non chocolate maker. Even Mars would be better suited than Kraft.
ReplyDeleteHershey will take the prize.
Although I am not sure how a non profit trust justifies such leveraged risk. Maybe it will look more like a merger.
Cadbury has of course recently divested itself of non food brands but these things go in cycles and it could return within the fold of a larger food group like Kraft, if the price is right.
ReplyDeleteI am surprised Mars isn't looking
Mars has a fairly large Wrigley gum purchase funded via Mr Buffet to sort through, and being private we do not really know how much debt or assets it has to make any more deals.
ReplyDeleteWill Hershey pull of a large leveraged deal funded via Mr Buffet again, despite his Kraft holdings. Or Buffet sidelined in this deal by a merger?
Buffet will look like a hypocrite if he is involved in a Hershey deal by talking his book on a the un-doing of the Kraft deal.
SB, Buffett seems to be all over the place over the last two years. Splitting his shares on one occasion and influencing markets by holding numerous "interviews". Things that he has written about in the negative.
ReplyDeleteIt looks like with all the other buys he has made recently, especially BSNF, he could like a play at Cadbury.
Even he knows he would have to pay a premium to get it as part of Kraft, so it is just a question of how a possible purchase would be funded.
I am with him on the issuing of shares by Kraft to pay for it. It stinks and it aint good for Kraft shareholders.
Lets wait for the new Kraft offer.