In 2009 Cadbury was doing well. So well, in fact, that it was starting to draw attention.
Jeremy Batstone-Carr, Head of Research at Charles Stanley explains: “The company had reported a marked improvement in trading over its second quarter first half result. So as a consequence of that we wondered whether it might begin to show up on the radar screens of potential competitive companies.”
A “DERISORY” OFFER
Sure enough, on September 7 Kraft Foods announced that it had made an offer to purchase Cadbury. Kraft was another company with history behind it, although somewhat younger than Cadbury, its founder had started out business selling cheese door-to-door in 1909.
Kraft made an offer of 10.2 billion pounds for the chocolate maker. It was an offer that Cadbury’s Chairman Roger Carr would dismiss as “derisory” triggering an all out war of words that would last for months.
“In its original form we have to say that it was[derisory],” Batstone-Carr says. “It undervalued the company, at less than two times sales, significantly lower than the 2.3 times sales that Kraft had paid for Danone’s biscuit operations, or the 3.75 sales paid by Mars for Wrigley. Carr had justification for his outburst once Kraft had broken cover.”
But Carr didn’t stop there. He went on to describe Kraft as a “low-growth conglomerate” – a line that was repeated in the press the world over. Kraft would respond by trying to bypass Cadbury’s board entirely, and took its offer straight to the shareholders.
OPEN MARKET
No sooner was Kraft’s proposal out in public than rumours spread that another company would attempt to acquire Cadbury. Nestle, Ferrero, and Hershey were all tipped to make an offer.
Most of these rumors turned out to be just that, rumors.
“We never regarded alternative offers as being particularly credible,” Batstrone-Carr says.
“The most credible rival would have been Nestle, but behind the scenes Nestle constantly back peddled. Hershey’s interest proved to be more lasting and there was evidence to suggest that the Hershey Trust, a 30 percent shareholder in Hershey, had made overtures to the Hershey board suggesting that they should make an approach to Cadbury, I suspect largely on the basis that both companies were concerned about the possible change in the global confectionary market.”
THE TIDE TURNS
In the end, it would turn out to be a rival company that tipped the scaled of the Kraft Cadbury battle, but it wouldn’t be a new bid for Cadbury that changed things.
“Well I think the key turning point probably happened around about the start of January,” Batstone-Carr says.
“Nestle ruled themselves out formally on the fifth and on the same day Kraft improved its offer, having benefited from the proceeds of the decision to sell its pizza business to Nestle. With its additional 3.7 billion Kraft was able to sweeten the cash element of its offer and from that point it began to look as if Cadbury had more of a fight on its hands.”
Kraft would face one more obstacle- from one of its most famous shareholders. Billionaire Warren Buffett of Berkshire Hathaway warned publicly against Kraft overpaying for Cadbury.
This would turn out to be a blessing in disguise.
Batstone-Carr explains: “Whether Berkshire Hathaway was genuinely uncomfortable or used it as a ruse to drag down Cadbury’s share price, the latter certainly worked. Cadbury’s share price moved at one stage very close to Kraft’s earlier but sweetened offer. The way things turned out Kraft was never forced to go to shareholders to sanction increased shares.”
On January 19 Kraft raised its offer to what proved to be a decisive level, and the same day Cadbury’s board recommended the offer to its shareholders. Many were surprised by the about turn by the previously hostile Cadbury.
“We were surprised by the meek way in which Cadbury’s board appeared to cave in to the equivalent 850p a share offer,” Batstone-Carr admits.
“It looked strange in the context of a trading update that pointed to continued underlying volume growth, continued margin improvement going forward and the possibility that over a medium term Cadbury’s terms could be trading closer to ten pounds than eight pounds.”
THE FUTURE
The deal has gone through, and Cadbury as an independent business is over after 186 years. Now the company faces an uncertain future.
“Kraft’s main interest in Cadbury lies in its emerging markets operations and I doubt there will be too many job losses there because it’s a part of the business that Kraft wants to own,” Batstone-Carr says.
“However, we already know that Cadbury’s senior executives are not being asked to stay on, which is a clear indication. You chop out the heads of the firm to make some pretty aggressive cuts thereafter.”
Jeremy Batstone-Carr, Head of Research at Charles Stanley explains: “The company had reported a marked improvement in trading over its second quarter first half result. So as a consequence of that we wondered whether it might begin to show up on the radar screens of potential competitive companies.”
A “DERISORY” OFFER
Sure enough, on September 7 Kraft Foods announced that it had made an offer to purchase Cadbury. Kraft was another company with history behind it, although somewhat younger than Cadbury, its founder had started out business selling cheese door-to-door in 1909.
Kraft made an offer of 10.2 billion pounds for the chocolate maker. It was an offer that Cadbury’s Chairman Roger Carr would dismiss as “derisory” triggering an all out war of words that would last for months.
“In its original form we have to say that it was[derisory],” Batstone-Carr says. “It undervalued the company, at less than two times sales, significantly lower than the 2.3 times sales that Kraft had paid for Danone’s biscuit operations, or the 3.75 sales paid by Mars for Wrigley. Carr had justification for his outburst once Kraft had broken cover.”
But Carr didn’t stop there. He went on to describe Kraft as a “low-growth conglomerate” – a line that was repeated in the press the world over. Kraft would respond by trying to bypass Cadbury’s board entirely, and took its offer straight to the shareholders.
OPEN MARKET
No sooner was Kraft’s proposal out in public than rumours spread that another company would attempt to acquire Cadbury. Nestle, Ferrero, and Hershey were all tipped to make an offer.
Most of these rumors turned out to be just that, rumors.
“We never regarded alternative offers as being particularly credible,” Batstrone-Carr says.
“The most credible rival would have been Nestle, but behind the scenes Nestle constantly back peddled. Hershey’s interest proved to be more lasting and there was evidence to suggest that the Hershey Trust, a 30 percent shareholder in Hershey, had made overtures to the Hershey board suggesting that they should make an approach to Cadbury, I suspect largely on the basis that both companies were concerned about the possible change in the global confectionary market.”
THE TIDE TURNS
In the end, it would turn out to be a rival company that tipped the scaled of the Kraft Cadbury battle, but it wouldn’t be a new bid for Cadbury that changed things.
“Well I think the key turning point probably happened around about the start of January,” Batstone-Carr says.
“Nestle ruled themselves out formally on the fifth and on the same day Kraft improved its offer, having benefited from the proceeds of the decision to sell its pizza business to Nestle. With its additional 3.7 billion Kraft was able to sweeten the cash element of its offer and from that point it began to look as if Cadbury had more of a fight on its hands.”
Kraft would face one more obstacle- from one of its most famous shareholders. Billionaire Warren Buffett of Berkshire Hathaway warned publicly against Kraft overpaying for Cadbury.
This would turn out to be a blessing in disguise.
Batstone-Carr explains: “Whether Berkshire Hathaway was genuinely uncomfortable or used it as a ruse to drag down Cadbury’s share price, the latter certainly worked. Cadbury’s share price moved at one stage very close to Kraft’s earlier but sweetened offer. The way things turned out Kraft was never forced to go to shareholders to sanction increased shares.”
On January 19 Kraft raised its offer to what proved to be a decisive level, and the same day Cadbury’s board recommended the offer to its shareholders. Many were surprised by the about turn by the previously hostile Cadbury.
“We were surprised by the meek way in which Cadbury’s board appeared to cave in to the equivalent 850p a share offer,” Batstone-Carr admits.
“It looked strange in the context of a trading update that pointed to continued underlying volume growth, continued margin improvement going forward and the possibility that over a medium term Cadbury’s terms could be trading closer to ten pounds than eight pounds.”
THE FUTURE
The deal has gone through, and Cadbury as an independent business is over after 186 years. Now the company faces an uncertain future.
“Kraft’s main interest in Cadbury lies in its emerging markets operations and I doubt there will be too many job losses there because it’s a part of the business that Kraft wants to own,” Batstone-Carr says.
“However, we already know that Cadbury’s senior executives are not being asked to stay on, which is a clear indication. You chop out the heads of the firm to make some pretty aggressive cuts thereafter.”