Thursday, January 21, 2010

Cadbury Acquisition a good deal for Kraft

I am still following the Kraft Inc [KFT.NYSE] acquisition of Cadbury PLC [CBRY.LSE] . A conditional deal for sale of Cadbury to Kraft has been approved by Cadbury management but it still needs the approval of both Kraft and Cadbury shareholders.

Nearly 10% shareholder of Kraft, Warren Buffett, publicly came out against a deal on Jan 5 and today on CNBC indicated that he would have voted against the acquisition.

The latest comment, if it isn't just being made to blow off some steam, appears to suggest that Kraft is paying too much for the maker of Dairy Milk, Jaffas, Chrunchie , Moro and other well known brands but this is where Buffett and myself part company.

Cadbury is a global brand and has dominance in the majority of the markets that it operates in, New Zealand is no exception.

Because of its strong brand position globally, its potential to grow in all its markets - especially in Asia - and the largely untapped market for Cadbury in the United States -where Cadbury is a minor player - the price to be paid for full control of the company must show a healthy premium to its recent trading activity. Cadbury has a strong economic moat - good brands, with high cashflow with a reasonable barrier to entry by competitors.

Warren Buffett seems to be ignoring this fact and it seems contrary to previous indications by him that in order to gain control of a company during an acquisition a premium is more often than not paid.

The price being paid by Kraft for Cadbury isn't the deal of the century but it is approaching fair price - on Kraft's part - considering what Kraft are getting for their shareholders moola.

Locally, New Zealand media have been speculating that Cadbury's Dunedin factory maybe the subject of staff cuts and that local brands maybe for the cut. While this is of course possible because of Kraft's high debt levels due to the acquisition and pre-deal debt levels, it would be folly on Kraft's part to repeat the recent mistakes of Cadbury in New Zealand and in other global markets.

I am having sugar overload over this deal. The Kraft acquisition of Kraft is not yet a fait a compli however, so there is still room for a diabetic attack. There is still time for other Cadbury tyre kickers like Hershey to make a higher bid for some of the sweet brown stuff.

Cadbury @ Share Investor

Bitter - Sweet Chocolate Business
Cadbury could learn a thing or two from 1980's Coca Cola Experiment

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