| 17:14 UK time, Tuesday, 5 January 2010
Kraft’s plans to buy Cadbury are in jeopardy, following the decision of Berkshire Hathaway to vote against its plan to issue 370m new shares to pay for the confectionery company.
Berkshire, founded by Warren Buffett, owns 9.4 per cent of Kraft. It is also probably the most respected investor in the world.
So it is embarrassing for Kraft that Berkshire will not authorise the transaction.
Berkshire has two concerns. First it says that Kraft should not be issuing shares at the current price of $27, because it sees this as a “very expensive ‘currency’”.
Second it is concerned that if it were to authorise the issue of the shares, it would in effect be authorising “a huge transaction without knowing its cost or the means of payment”.
There is a paradox here of course.
Berkshire fears that Kraft would be paying too much for Cadbury.
Whereas Cadbury’s board fears that the offer from Kraft is inadequate.
Roger Carr, chairman of Cadbury, says: “In essence Kraft’s offer is limited by powerful Kraft shareholders restricting what they can offer in stock and is constrained by Kraft’s rating agency limiting what they can offer in cash.
The so-called discipline of Kraft [in not wanting to pay more for Cadbury] is a smokescreen to justify an attempt to steal the Cadbury from its shareholders”.
Hmmm.
Unless you are a conspiracy theorist who believes that Berkshire is in cahoots with Kraft’s management to secure Cadbury at a knockdown price, you’d have to assume that the game is up – and that Cadbury will remain independent.
But would “friends” of Kraft’s board point out – as Berkshire has done – that this company spent $3.6bn on its own stock at $33 per share in 2007, presumably on the basis that $33 was too cheap for the stock, and now wants to issue shares when they are even cheaper.
These are the observations of a shareholder who doesn’t appear to have huge respect for the judgement of management.
It is therefore reasonable to assume that Berkshire really doesn’t like the look of the Cadbury takeover.
So Kraft now has till January 19 to persuade Berkshire that its price for Cadbury represents very good value and to persuade Cadbury shareholders that they are getting a fabulous price.
Those two ambitions don’t look altogether consistent.
In other words, there must be a pretty good chance that Cadbury – against prevailing opinion – will remain independent.
That said, I am not sure the penny has dropped in the market place, because if it had surely Cadbury’s share price would have fallen by more than today’s 3 per cent.
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