By FT Reporters
Published: January 20 2010 15:32 | Last updated: January 20 2010 15:32
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Warren Buffett, the billionaire investor who is the largest shareholder in Kraft, on Wednesday criticised the US food group’s £11.6bn agreement to buy Cadbury as “a bad deal”.
Mr Buffett told CNBC, the US business television network, that he had “a lot of doubts” over the Cadbury purchase. He said he would have voted against the deal had Kraft sought shareholder approval.
Kraft investors will not have the chance to vote on the deal, which involves the US group issuing 265m new shares, equivalent to about 18 per cent of its existing share capital, because that is below the 20 per cent level at which shareholder approval is required.
Mr Buffett, who holds more than 9 per cent of Kraft, said the company was worth more than its current stock price – down 2 per cent at $28.72 in early Wall Street trading on Wednesday – and that its use of stock in the Cadbury deal was “very expensive currency”.
However, the legendary investor – known as the Sage of Omaha – dismissed a suggestion that he sell his Kraft stake to show his unhappiness with the Cadbury deal. He described Irene Rosenfeld, Kraft chief executive, as a ”good operator” and a ”good person”, adding that has ”cordial relations” with her despite their ”difference of opinion”.
Mr Buffett had earlier this month called on Kraft investors to oppose Kraft’s plan to issue as many as 370m shares to fund its hostile takeover of Cadbury.
In the event, Kraft avoided such a large share issue by agreeing to sell its pizza business to Nestlé of Switzerland for $3.7bn to help fund its cash-and-stock bid for Cadbury. But Mr Buffett also questioned that deal, saying it had been done in “an enormously tax-inefficient way”.
Ms Rosenfeld on Tuesday said the Cadbury deal would “transform our portfolio and accelerate long-term growth from 4 per cent to 5 per cent.” It would also help Kraft increase its long-term earnings per share growth from the 7-9 per cent range to the 9-11 per cent range, she said.
The US food group finally secured Cadbury’s backing for its hostile approach on Tuesday after raising its offer to 850p a share, ending five months of hostile relations after Kraft made an unsolicited bid in late August. The combined company would rank alongside privately-held Mars as one of the world’s biggest confectionery groups.
Separately, Fitch, the credit ratings agency, on Wednesday downgraded Kraft by one notch to BBB minus, the lowest investment grade, citing “the anticipated increase in financial leverage of the combined Kraft/Cadbury”.
Rival agency Standard & Poor’s had earlier said it was maintaining Kraft’s rating at A-minus but was keeping it on on Creditwatch Negative, holding out the possibility of a cut. Moody’s said it was likely to keep Kraft at investment grade, but the rating was under review for possible downgrade.
The Cadbury deal will push Kraft’s debt pile from $20bn to more than $30bn once it has taken on $9.5bn of debt to fund the cash portion of the offer and assumed more than $3bn in Cadbury debt.
Ms Rosenfeld said on Tuesday that she did not expect Kraft to be downgraded, given that the expected strong cash flow from the combined businesses would lower its leverage ratio to three times within 18-24 months.
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