By MarketWatch
Jan. 5, 2010, 1:46 p.m. EST
READ BUFFETT’S PRESS RELEASE ON KRAFT SHARE ISSUE
SAN FRANCISCO (MarketWatch) — Kraft Foods CEO Irene Rosenfeld got an earful Tuesday, when she was told that her costly pursuit of Cadbury Plc amounts to biting off more than her company can chew.
This blunt criticism comes from none other than billionaire Warren Buffett, the usually reserved head of Berkshire Hathaway which, with a 9.4% stake, is Kraft’s biggest shareholder.
Buffett warns Kraft
In an unusual move, Warren Buffett issues a public warning to Kraft, which is trying to take over Cadbury. The News Hub analyzes Buffett’s atypical action.
Buffett said “no” to Kraft’s request to issue new shares to finance its hostile bid for the London-based chocolate maker. It’s a rare public rebellion by Buffett, whose call for fiscal accountability counters Rosenfeld’s request for what Buffett labeled a “blank check” for the Cadbury pursuit. See Buffett’s “no” vote.
The timing is perfect. Kraft has just raised its bid for Cadbury, which in turn wasted no time rejecting it, just as it has rejected every overture from Rosenfeld since this trans-Atlantic food fight started back in September.
Sensing Buffett’s move could torpedo a deal, investors playing the takeover arbitrage sent Cadbury’s stock down 3.5%, while Kraft shares jumped 3.5%. It’s tempting to assume Kraft shares are rallying on relief that management might see the folly of pursuing Cadbury at the risk of watering down shareholder value still further.
Kraft has two more weeks to submit another offer. While Cadbury has spurned all of Kraft’s bids as unworthy, its share price has spiked 33%. And let’s face it: All that unsolicited attention can make one giddy.
But Nestle has already said it’s not interested in mounting a rival bid for Cadbury, and the other key contenders, Hershey and Italy’s Ferrero, have been sitting quietly in the wings. So if Buffett blocks the deal, Cadbury risks going back to Square 1. So do its investors.
The same goes for Kraft. In the three years Rosenfeld has led the company, her rounds of job cuts, asset sales and restructuring have yielded little growth.
Which means Buffett’s rebellion can really have it both ways: If it shuts down Kraft’s effort to take over Cadbury, it could force the company to refocus on building the business from within rather than pay top dollar for growth via acquisitions. And, at the same time, Cadbury shareholders could see Buffett’s move as a signal that Kraft’s hands are tied — that it simply can’t keep raising its offer. And if that’s the case, maybe it’s time to take what’s on the table.
Either way, Buffett can take credit for calling everyone’s bluff.
— Jim Jelter
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