Case study: Krafts takeover of Cadbury

The story In 2009, US food company Kraft Foods launched a hostile bid for Cadbury, the UK-listed chocolate maker. As became clear almost exactly two years later in August 2011, Cadbury was the final acquisition necessary to allow Kraft to be restructured and indeed split into two companies by the end of 2012: a grocery business worth approximately $16bn; and a $32bn global snacks business. Kraft needed Cadbury to provide scale for the snacks business, especially in emerging markets such as India. The challenge for Kraft was how to buy Cadbury when it was not for sale. The history

Kraft itself was the product of acquisitions that started in 1916 with the purchase of a Canadian cheese company. By the time of the offer for Cadbury, it was the worlds second-largest food conglomerate, with seven brands that each generated annual revenues of more than $1bn. Cadbury, founded by John Cadbury in 1824 in Birmingham, England, had also grown through mergers and demergers. It too had recently embarked on a strategy that was just beginning to show results. Ownership of the company was 49 per cent from the US, despite its UK listing and headquarters. Only 5 per cent of its shares were owned by short-term traders at the time of the Kraft bid. The challenge Not only was Cadbury not for sale, but it actively resisted the Kraft takeover. Sir Roger Carr, the chairman of Cadbury, was experienced in takeover defences and immediately put together a strong defensive advisory team. Its first act was to brand the 745 pence-per-share offer unattractive, saying that it fundamentally undervalued the company. The team made clear that even if the company had to succumb to an unwanted takeover, almost any other confectionery company (Nestl, Ferrero and Hershey were all mentioned) would be preferred as the buyer. In addition, Lord Mandelson, then the UKs business secretary, publicly declared that the government would oppose any buyer who failed to respect the historic confectioner. The response Cadburys own defence documents stated that shareholders should reject Krafts offer because the chocolate company would be absorbed into Krafts low growth conglomerate business model an unappealing prospect that sharply contrasts with the Cadbury strategy of a pure play confectionery company.

Little did Cadburys management know that Krafts plan was to split in two to eliminate its conglomerate nature and become two more focused businesses, thereby creating more value for its shareholders.

The result The Cadbury team determined that a majority of shareholders would sell at a price of roughly 830 pence a share. A deal was struck between the two chairmen on January 18 2010 at 840 pence per share plus a special 10 pence per share dividend. This was approved by 72 per cent of Cadbury shareholders two weeks later. The key lessons In any takeover, especially a cross-border deal in which the acquired company is as well known as Cadbury was in the UK, the transaction will be front-page news. In this case, it was the lead business story for at least four months. Fortunately, this deal had no monopoly or competition issues, otherwise those regulators could also have been involved. But aside from any regulators, most other commentators will largely be distractions. It is important for the acquiring companys management and advisers to stay focused on the deal itself and the real decision-makers the shareholders of the target company. As this deal demonstrates, these shareholders may not (and often will not) be the long-term traditional owners of the target company stock, but rather very rational hedge funds and other arbitrageurs (in Cadburys case, owning 31 per cent of the shares at the end), who are swayed only by the offer price and how quickly the deal can be completed. Other stakeholders may have legitimate concerns that need to be addressed but this can usually be done after the deal is completed, as Kraft did. The writer is a professor in the practice of finance at Cass Business School, where he is also the director of the M&A research centre.

Acquisition by Kraft Foods

On 7 September 2009 Kraft Foods made a 10.2 billion (US$16.2 billion) indicative takeover bid for Cadbury. The offer was rejected, with Cadbury stating that it undervalued the company.[20] Kraft launched a formal, hostile bid for Cadbury valuing the firm at 9.8 billion on 9 November 2009.[21] Business Secretary Peter Mandelson warned Kraft not to try to "make a quick buck" from the acquisition of Cadbury.[22]

On 19 January 2010, it was announced that Cadbury and Kraft Foods had reached a deal and that Kraft would purchase Cadbury for 8.40 per share, valuing Cadbury at 11.5bn (US$18.9bn). Kraft, which issued a statement stating that the deal will create a "global confectionery leader", had to borrow 7 billion (US$11.5bn) in order to finance the takeover.[23] The Hershey Company, based in Pennsylvania, manufactures and distributes Cadbury-branded chocolate (but not its other confectionery) in the United States and has been reported to share Cadbury's "ethos".[24] Hershey had expressed an interest in buying Cadbury because it would broaden its access to faster-growing international markets.[25] But on 22 January 2010, Hershey announced that it would not counter Kraft's final offer.[26][27][28] The acquisition of Cadbury faced widespread disapproval from the British public, as well as groups and organisations including trade union Unite,[29] who fought against the acquisition of the company which, according to Prime Minister Gordon Brown, was very important to the British economy.[30] Unite estimated that a takeover by Kraft could put 30,000 jobs "at risk",[24][31][32] and UK shareholders protested over the mergers and acquisitions advisory fees charged by banks. Cadbury's M&A advisers were UBS, Goldman Sachs and Morgan Stanley.[33][34][35] Controversially, RBS, a bank 84% owned by the United Kingdom Government, funded the Kraft takeover.[36][37] On 2 February 2010, Kraft secured over 71% of Cadbury's shares thus finalising the deal.[38] Kraft had needed to reach 75% of the shares in order to be able to delist Cadbury from the stock market and fully integrate it as part of Kraft. This was achieved on 5 February 2010, and the company announced that Cadbury shares would be de-listed on 8 March 2010.[39] On 3 February 2010, the Chairman Roger Carr, chief executive Todd Stitzer and chief financial officer Andrew Bonfield[40] all announced their resignations. Stitzer had worked at the company for 27 years.[41] On 9 February 2010, Kraft announced that they were planning to close the Somerdale Factory, Keynsham, with the loss of 400 jobs.[42] The management explained that existing plans to move production to Poland were too advanced to be realistically reversed, though assurances had been given regarding sustaining the plant. Staff at Keynsham criticised this move, suggesting that they felt betrayed and as if they have been "sacked twice".[43] On 22 April 2010, Phil Rumbol, the man behind the famous Gorilla advertisement, announced his plans to leave the Cadbury company in July following Kraft's takeover.[44] In June 2010 the Polish division, Cadbury-Wedel, was sold to Lotte of Korea. The European Commission made the sale a condition of the Kraft takeover. As part of the deal Kraft will keep the Cadbury, Hall's and other brands along with two plants in Skarbimierz. Lotte will take over the plant in Warsaw along with the E Wedel brand.[45] On 4 August 2011, Kraft Foods announced they would be splitting into two companies beginning on 1 October 2012. The confectionery business of Kraft became Mondelz International, of which Cadbury is a subsidiary.