Just days ago Kraft's hostile takeover bid was dismissed by Cadbury as derisory. James Ball reveals the 10 factors that forced it to cave in to the US behemoth
A week is a long time in chocolate. In a report sent by Cadbury to its shareholders mere days ago, Kraft CEO Irene Rosenfeld was described as heading "an unfocused conglomerate" that "over-commits and under-delivers". "Don't let Kraft steal your company," the Cadbury board urged.
Yet now it's all over bar the shouting, and Rosenfeld is about to become Cadbury's new boss. On Tuesday Cadbury's board finally called a halt to its spirited defence and, faced with an irresistible £11.9bn offer, ran up the white flag.
How did a bid many sceptics in the market gave less than a 50/50 chance of succeeding get pushed through? While there's no doubt Kraft had some luck on its side, steely determination, persistent haggling and one or two activist shareholders all played their part too. Here The Grocer reveals the 10 reasons Kraft won through.
In an exclusive interview the week the Kraft bid became public, Cadbury's UK MD Trevor Bond told The Grocer Cadbury wasn't "a bitesize company", but events seem to have proven otherwise. Since spinning off the Schweppes business in 2008, Cadbury has been a tightly-focused company with sales of £5.4bn an irresistible target for a behemoth like Kraft, with its £44bn -a-year turnover. Had Cadbury still been the larger business it once was, not only would it present a less attractive opportunity, raising the cash to buy it out may have proven an impossible ask.
Some takeover attempts are little more than dipping a foot in the water. This one wasn't. By adopting such an aggressive takeover strategy, Irene Rosenfeld effectively staked her reputation on a successful deal. Had she been thwarted, few believe she could have stayed in her job. This all-out assault helped convince market players Kraft would see the bid through, leading hedge funds and other short-term buyers to take Cadbury stakes in the hope of benefiting from a buyout.
Rosenfeld did more than stake her own fortunes on a successful deal: a good chunk of Kraft's growth was sacrificed to make the final offer possible. In what must emerge as the definitive move of the bidding process, Kraft sold its profitable and fast-growing US pizza business to Nestlé for $3.5bn cash. In one fell swoop, Kraft got its hands on more cash without increasing its debt and took out its most serious potential rival bidder for Cadbury.
With Nestlé out of the picture as solo bidder, all eyes were on Hershey and Ferrero as the only potential rivals to Kraft and neither were big enough to finance a bid on their own.
Analysts saw a joint Hershey and Nestlé bid as the most viable possible offer, but after Nestlé pulled out and the Ferrero family reportedly expressed reluctance to sacrifice their independence, prospects of a bidding war fell close to zero. Hershey's trust status also made any reactive Cadbury takeover of Hershey almost impossible, though management insisted this wouldn't have been an attractive move in any case.
At first, the intervention by Warren Buffett, probably the world's most famous investor, looked as though it might scupper rather than facilitate Kraft's bid. But although Buffett's decision as a major Kraft stockholder to vote against its bid and warn against overpaying for Cadbury threw the bid into doubt, it also helped Kraft shares recover, upping the value of Kraft's bid.
Buffett's action also low-balled expectations making the eventual 850p-a-share offer look generous rather than meagre meaning that though Buffett is clearly not a fan of the deal, he may have helped push it through.
Another billionaire investor closely related to the deal was Nelson Peltz - one of very few people to hold major shareholdings in both Cadbury and Kraft.
Peltz, the infamous activist investor, warned Cadbury management as early as 2007 it could face a buyout if it didn't take his recommendations seriously and was also instrumental in its mutation to a pure-play confectionery player.
Also in 2007, he secured a two-year deal with Kraft management not to publicly criticise the company in exchange for two independent director appointments on Kraft's board. Tellingly, this gagging deal expired part-way through Kraft's bidding process, yet Peltz remained uncharacteristically quiet. By this time he had also, intriguingly, sold the majority of his shares in Kraft. Anyone looking for a silent player behind the scenes driving this deal should look no further than Peltz.
Cadbury has a high proportion of US shareholders, meaning few had strong ideological reasons to keep the business British, but the clincher was the huge proportion of hedge fund shareholders who bought into the company solely in the hope of a deal.
Not wanting to keep hold of the shares for the long-term, these institutions were pushing for acceptance at a decent price. A 10% return on an investment over just four months was an offer few could have refused.
Cadbury was one of the few major iconic British brands left that wasn't a taxpayer-owned bank. But despite this heritage, the UK government put up no substantive opposition to the bid, and even public outcry was muted. Had a similar scenario unfolded in France, Japan or China, the story would have been very different.
Cadbury was not only an attractive target, it was operating in one of the most relaxed markets in the world when it comes to foreign ownership. So the only people Kraft had to convince of the merits of the deal were the shareholders saving it the burden of any cast-iron commitments on British jobs.
Last weekend, the feeling was that Kraft might be able to seal the deal with an 830p offer and reports suggested Cadbury's board had been advised this figure would be hard to oppose.
But Kraft went higher. When the Cadbury board suggested it wouldn't support an 830p bid, Kraft upped the offer to 840p. When this wasn't enough, it factored in a special dividend, taking the offer to an effective 850p. Rosenfeld's willingness to haggle and up her price from a "derisory" level to a 10% premium on the original, including an extra £2bn in cash saved Cadbury and Kraft what could have been another fortnight of costly wrangling and dealmaking, and sent the message out that no other bidder would have a shot.
Her task now is to prove to shareholders that after the painful and lengthy integration process, the extra 20p will have been a price worth paying.
For most businesses, the global recession has made finance trickier to raise, but with a big balance sheet, even at the final price accepted by the Cadbury board, Kraft got a bargain by the standards of recent confectionery deals.
The 850p-a-share offer comes in at 13 times Cadbury's EBITDA. By contrast, Mars' purchase of Wrigley was secured at 18.5 times EBITDA, Perfetti and Van Melle settled for 15 times, while Wrigley bought Kraft's candy brands for a 15 times multiple. In that context, Kraft's raised offer looks like a steal.
Read an interview with Kraft UK chief Nick Bunker, the next boss of Cadbury here.
Carr defends Cadbury sell-off but admits job losses ‘inevitable’ (20 January 2010)
Kraft strong ‘with or without Cadbury’, says Rosenfeld (13 January 2010)
Me, myself & Irene: Cadbury chief Todd Stitzer talks (19 December 2010)