Kraft Sweetens the Offer to Overcome Cadbury’s Resistance

question 123

Essay

Kraft Sweetens the Offer to Overcome Cadbury’s Resistance

Despite speculation that offers from U.S.-based candy company Hershey and the Italian confectioner Ferreiro would be forthcoming, Kraft’s bid on January 19, 2010, was accepted unanimously by Cadbury’s board of directors. Kraft, the world’s second (after Nestle) largest food manufacturer, raised its offer over its initial September 7, 2009, bid to $19.5 billion to win over the board of the world’s second largest candy and chocolate maker. Kraft also assumed responsibility for $9.5 billion of Cadbury’s debt.

Kraft’s initial bid evoked a raucous response from Cadbury’s chairman Roger Carr, who derided the offer that valued Cadbury at $16.7 billion as showing contempt for his firm’s well-known brand and dismissed the hostile bidder as a low-growth conglomerate. Immediately following the Kraft announcement, Cadbury’s share price rose by 45 percent (7 percentage points more than the 38 percent premium implicit in the Kraft offer). The share prices of other food manufacturers also rose due to speculation that they could become takeover targets.

The ensuing four-month struggle between the two firms was reminiscent of the highly publicized takeover of U.S. icon Anheuser-Busch in 2008 by Belgian brewer InBev. The Kraft-Cadbury transaction stimulated substantial opposition from senior government ministers and trade unions over the move by a huge U.S. firm to take over a British company deemed to be a national treasure. However, like InBev’s takeover of Anheuser-Busch, what started as a donnybrook ended on friendly terms, with the two sides reaching final agreement in a single weekend.

Determined to become a global food and candy giant, Kraft decided to bid for Cadbury after the U.K.-based firm spun off its Schweppes beverages business in the United States in 2008. The separation of Cadbury’s beverage and confectionery units resulted in Cadbury becoming the world’s largest pure confectionery firm following the spinoff. Confectionery companies tend to trade at a higher value, so adding the Cadbury’s chocolate and gum business could enhance Kraft’s attractiveness to competitors. However, this status was soon eclipsed by Mars’s acquisition of Wrigley in 2008.

A takeover of Cadbury would help Kraft, the biggest food conglomerate in North America, to compete with its larger rival, Nestle. Cadbury would strengthen Kraft’s market share in Britain and would open India, where Cadbury is among the most popular chocolate brands. It would also expand Kraft’s gum business and give it a global distribution network. Nestle lacks a gum business and is struggling with declining sales as recession-plagued consumers turned away from its bottled water and ice cream products. Cadbury and Kraft fared relatively well during the 2008–2009 global recession, with Cadbury’s confectionery business proving resilient despite price increases in the wake of increasing sugar prices. Kraft had benefited from rising sales of convenience foods because consumers ate more meals at home during the recession.

The differences in the composition of the initial and final Kraft bids reflected a series of crosscurrents. Irene Rosenfeld, the Kraft CEO, not only had to contend with vituperative comments from Cadbury’s board and senior management, but she also was soundly criticized by major shareholders who feared Kraft would pay too much for Cadbury. Specifically, the firm’s largest shareholder, Warren Buffett’s Berkshire Hathaway with a 9.4 percent stake, expressed concern that the amount of new stock that would have to be issued to acquire Cadbury would dilute the ownership position of existing Kraft shareholders. In an effort to placate dissident Kraft shareholders while acceding to Cadbury’s demand for an increase in the offer price, Ms. Rosenfeld increased the offer by 7 percent by increasing the cash portion of the purchase price.

The new bid consisted of $8.17 of cash and 0.1874 new Kraft shares, compared to Kraft’s original offer of $4.89 of cash and 0.2589 new Kraft shares for each Cadbury share outstanding. The change in the composition of the offer price meant that Kraft would issue 265 million new shares compared with its original plan to issue 370 million. The change in the terms of the deal meant that Kraft would no longer have to get shareholder approval for the new share issue, since it was able to avoid the NYSE requirement that firms issuing shares totaling more than 20 percent of the number of shares currently outstanding must receive shareholder approval to do so.
-Which firm is the acquirer and which is the target firm?

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