WALL STREET JOURNAL: Cadbury Accepts Fresh Kraft Offer

DANA CIMILLUCA, JEFFREY MCCRACKEN and ILAN BRAT

JANUARY 19, 2010, 6:43 A.M. ET

Kraft Foods Inc. on Tuesday clinched a deal to acquire Cadbury PLC for £11.9 billion ($19.44 billion), in a trans-Atlantic tie-up that ends the nearly 200-year independence of Britain’s most famous candy company.

After more than four months of public sparring that followed Kraft’s hostile-takeover approach for the U.K. confectioner, Cadbury’s board accepted the U.S. food giant’s offer as Kraft relented to the demands of Cadbury management and shareholders, sweetening its bid and adding cash.

Kraft agreed to pay 840 pence a share for Cadbury, as well as a 10 pence dividend. The revised offer is for 500 pence in cash for each Cadbury share and 0.1874 new Kraft shares for each Cadbury share, an increase from its original offer of 300 pence in cash and 0.2589 new Kraft shares.

Tuesday’s deal unites Cadbury, which focuses solely on candy and traces its roots to 1824, with its larger and more diversified U.S. counterpart. Kraft covets Cadbury in part because of the U.K. company’s access to fast-growing developing markets such as India and Brazil.

The deal came as Kraft faced a deadline imposed by U.K. takeover authorities to make a final offer for Cadbury by the end of Tuesday. Cadbury has repeatedly rebuffed Kraft since the Northfield, Ill., company first publicly announced its offer in early September, which was then valued at about $16.5 billion.

Many Cadbury shareholders in recent days have been vocal in their opposition to Kraft’s cash-and-stock offer, which until the weekend was valued at about 770 pence a share. They might now be won over by the new offer, since many of the holders are hedge funds that bought Cadbury stock after Kraft put the company in play, and are only looking for a relatively small return. The recommendation from Cadbury’s board is also likely to make a big difference in convincing long-term Cadbury shareholders, many of them big U.K. institutional investors, that selling to Kraft now is the right thing to do. Cadbury shareholder have until Feb. 2 to accept the offer.

The latest round of talks was initiated by Kraft on Monday, according to a person familiar with the matter.

The move to engage with Kraft was an abrupt U-turn for Cadbury and its chairman, Roger Carr. He called Kraft a “low-growth conglomerate,” accused it of showing “contempt” for Cadbury shareholders with its initial offer price and asked those shareholders not to let their company be “stolen.” He and Cadbury Chief Executive Todd Stitzer have also criticized the track record of Kraft management, led by CEO Irene Rosenfeld. The two men repeatedly signaled that they would rather do a deal with Hershey Co., which they indicated would be a better cultural and operational fit for Cadbury.

Bloomberg News

The deal comes with significant risks for Kraft. Cross-border transactions have tended to fare poorly over the years. And Kraft’s own shareholders—including its largest holder, Warren Buffett‘s Berkshire Hathaway—have publicly worried about overpaying for Cadbury.

Ms. Rosenfeld met with Mr. Buffett recently and he was “totally supportive” of the new terms, a person familiar with Kraft’s offer said. Mr. Buffett didn’t return calls requesting comment.

Combining with Cadbury would catapult Kraft into the highest tier of the global confectionery industry, potentially expanding Kraft’s sales outside of North America and Europe. Already, Cadbury is the biggest confectioner in growth markets such as India, Mexico, Egypt and Thailand, according to consulting firm Euromonitor International, and emerging markets provide 38% of the company’s global sales, compared with about 20% at Kraft. Cadbury’s sales in the Asia-Pacific region alone amount to about 20% of the company’s revenue. Cadbury has about $500 million in sales in Mexico, while Kraft has about $350 million there, according to Barclays Capital analyst Andrew Lazar.

Buying Cadbury would also add strong sales of chewing gum, especially in Latin America, to Kraft’s portfolio. Confectionary products typically have higher margins than Kraft’s company-wide margin.

In addition, Kraft would be able to secure more sales at convenience stores in the U.S. and Europe, a growing outlet for selling food in small servings. The gum, chocolate and other food sold in those outlets tend to carry higher profit margins than food sold at a grocery store, and convenience stores typically carry few Kraft products. Grabbing hold of Cadbury would immediately give Kraft a potentially new, and more profitable, channel of distribution.

“It’s a great deal for Kraft as it minimizes dilution of shareholders,” said William Ackman, head of Pershing Square Capital Management, which owns about 2.2% of Kraft shares. “Cadbury could not have achieved the same values on its own.”

Should the talks between Kraft and Cadbury prove successful, it is likely that Hershey, which has been considering a bid of its own, will drop out, said people close to the U.S. chocolate maker. A deal would largely consign Hershey to selling chocolate in the U.S., a country with a slow-growing population in the midst of deep economic turmoil. Without greater access to growth markets Hershey faces a future of sales and earnings growth largely dependent on price increases or cost cuts. A spokesman for Hershey declined to comment.

For Mr. Carr, the Cadbury chairman, the current saga began at the Lisbon airport one Friday afternoon last August. On his personal mobile phone, he found a voice mail from Kraft CEO Ms. Rosenfeld asking him for a meeting in London the following week.

When the two later met at Mr. Carr’s office, Ms. Rosenfeld surprised Mr. Carr by almost immediately announcing she had a proposal to make. What surprised him even more was that she expected a swift answer, he recalled. Mr. Carr said the price she had proposed was inadequate and that he needed to confer with Cadbury’s board. The meeting with Ms. Rosenfeld lasted a mere 20 minutes.

“She got on her Gulfstream, she flew back to America and I never heard from her again —until the letter,” Mr. Carr recalled, referring to the Aug. 28 letter that put the iconic company on the block.

—Michael Carolan and Cecilie Rohwedder contributed to this article.

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