Cadbury melts into Kraft

While British media focus on the cultural importance of Cadbury following its sale to Kraft Foods, the history of brokering a deal for the troubled choclatier is primarily an issue of business and finance. Grace Walsh gives us the overview

The midnight deal that sealed the fate of Cadbury formally ended five months of hostile takeover negotiations. Kraft’s £11.6 billion bid is comprised of an 840 pence per share offer plus a 10 pence dividend on the unaffected share price as of 4 September 2009. Cadbury shareholders officially have until February 2 this year to approve the deal. As Kraft’s offer is largely comprised of cash it does not require its own shareholders to vote on the acquisition and only requires the agreement of fifty percent of Cadbury shareholders to move forward with the takeover.
Kraft increased its borrowing to $9.5 billion to finance the cash part of the offer, following shareholder Warren Buffet’s criticism of using too much stock to finance the deal. Mr. Buffet argued that Kraft’s use of stock in the Cadbury deal was an “expensive currency”, prompting speculation that Kraft’s shares were undervalued at current prices. CEO of Kraft, Irene Rosenfeld’s final offer of sixty percent cash, which she had hoped would sate Mr. Buffet’s fears of using too much stock, also drew criticism from the shareholder. He said he felt “poor” following the Cadbury deal because it came with $1.3 billion of reorganisation costs and $390 million of deal fees. He was also unhappy with the sale of Kraft’s “very fine pizza business” this month to Nestlé. Mr. Buffet stated publicly that he and Ms. Rosenfeld had a strong relationship, calling her a “good operator”, but he openly admitted his concerns regarding the success of the acquisition. Kraft’s level of debt will rise to over $30 billion including the $3 billion of Cadbury debt it will assume.
Kraft’s reasons for acquiring the booming UK confectioner include its desire to exploit positive synergies to the tune of at least $675 million and to boost its growth, which had been stagnant, with Cadbury’s girth and optimism. 2009 was a profitable year for Cadbury with 5% organic growth and EBITDA of £1.02 billion.
Kraft’s initial offer of 720 pence per share only gave an enterprise value of twelve times EBITDA, relatively low for an industry where takeover values usually fluctuate between fourteen and fifteen times EBITDA. Their final offer of 840 pence per share plus a ten pence dividend came closer to satisfying Cadbury’s initial demand of 850 pence per share, amounting to approximately fifteen times EBITDA. Although some shareholders have expressed disappointment that the company’s board did not get a higher price, most are expected to approve the deal.
In September of last year, Cadbury dismissed Kraft’s initial offer of £10.2 billion as derisory and rapidly mounted a stiff defence to Kraft’s offer. Lazard Ltd., Citigroup and Deutsche Bank advised Kraft whilst Morgan Stanley, UBS and Goldman Sachs represented Cadbury’s interests. The takeover bid drew speculation that rival bids would appear from Swiss confectionery giant, Nestlé, American favourite Hershey and Italian family-run business Ferrero. However, Nestlé failed to engage in the bidding process due to regulatory concerns that merging the two companies would have negative effects on competition.
Hershey markets Cadbury products in the US under an exclusive licence and was rumoured to be considering mounting a rival bid for the UK-based confectioner. Hershey, who is controlled by a trust and would represent a stronger cultural fit and fewer job losses than Kraft, was understood to be the preferred option for Cadbury. The American chief executive of Cadbury is twice believed to have sought a merger between the two companies. Attempts failed both times as the controlling trust behind Hershey refused to support the deal. Following their failure to top Kraft’s offer and pay a £118 million break fee, Hershey disqualified itself from the race to rescue the UK’s “national treasure”.
Early reports from sources close to the Ferrero family stated that they were “absolutley united” on their decision to jointly explore an acquisition of Cadbury with Hershey. However, late last week they formally withdraw as a counter-bidder to Kraft before a UK Takeover Panel. Cadbury’s white knight failed to appear and the deal was approved on the 2 February.
Following the announcement of the proceeding acquisition of Cadbury, the Confederation of British Industry, a powerful lobby group, issued a stark warning to British and US business: beware of embarking on a wave of value-destroying acquisitions as the country emerges from recession. Mergers and acquisitions are often seen as a quick and sure-fire way to achieve growth following recessionary cost-cutting and saving. In the aftermath of the financial crisis the cost of borrowing has increased dramatically, hovering two hundred basis points above the LIBOR, as opposed to fifty in 2007. Combined with the fall in the value of the sterling, many firms including Kraft are looking towards the UK for expansion. Kraft’s rationale for acquiring Cadbury, driven by these factors and the lure of synergies, in a recessionary time may well be considered profitable, but fears of arbitrage and concerns over Kraft’s financial standing pose significant threats to the long-term viability of this deal.