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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c Share Investor 2010

Bitter - Sweet Chocolate Business

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
Buy new: $37.96 / Used from: $29.61
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c Share Investor 2010