Author: Darren Rickard

Oracle’s Kraft call draws candy-stake scrutiny

By JOSH KOSMAN

Last Updated: 10:06 AM, January 7, 2010

Posted: 12:59 AM, January 7, 2010

Billionaire Warren Buffett‘s decision to weigh in on Kraft’s hostile pursuit of Cadbury may land him in hot water with Uncle Sam’s antitrust cops.

In voicing his opposition Tuesday to Kraft issuing more shares in order to raise its offer for the British candy maker, sources familiar with the matter said the Oracle of Omaha may have tipped his hand about wanting to protect another candy company in which he has deep ties: Mars.

“To the extent Kraft pays less [for Cadbury], it can be less aggressive in the marketplace” this person said.

Added an antitrust lawyer familiar with the workings of the US Federal Trade Commission: “I think the triggering event [for the FTC to investigate Buffett] could be if his attempt to muck up Kraft’s deal was done to protect his position in Mars.”

REUTERS

Warren Buffett

In addition to owning a 9.4 percent stake in Kraft, Buffett also has a large debt and equity position in privately held Mars. In 2008, Buffett’s Berkshire Hathaway loaned Mars $4.4 billion to finance its purchase of gum maker Wrigley, and invested another $2.1 billion in Mars in exchange for preferred shares.

A Berkshire Hathaway spokeswoman declined to comment.

Some sources speculated about one reason behind Buffett’s rare decision to issue a tersely worded letter in opposition to Kraft selling more shares. They said if Kraft pays too much for Cadbury, the food giant would be under pressure to boost sales, and perhaps lower prices, in order to sell more candy. That, in turn, could potentially hurt Mars’ market share.

Currently, Mars, which sells M&Ms and Snickers, has around 15 percent of the global candy market. A Kraft-Cadbury combination would boast an equal share.

The antitrust lawyer said the FTC has had an informal policy of not investigating investors with stakes in companies in the same industry when those interests are below 10 percent.

However, in the case of Kraft, Buffett is the largest shareholder and his action Tuesday is likely to have a significant impact on CEO Irene Rosenfeld and what she does next.

“I think this might cause them to look,” the first source said, adding that the FTC’s bureau of competition has become more aggressive.

Indeed, under President Obama, regulators have taken a more aggressive stance when it comes to antitrust issues, going as far as putting Google through its paces on a number of fronts, despite its employees’ deep-pocketed support of his presidential campaign.

If the FTC were to take action, it would likely come before a Jan. 19 deadline for Kraft to submit a bid for Cadbury.

The first step would be asking Berkshire Hathaway for recent letters and documents related to correspondence with Mars and Kraft. If that was not satisfactory, the FTC could issue a subpoena.

Meanwhile, there were reports yesterday that Cadbury directors had approached members of Hershey’s board about the US chocolate company submitting a rival bid. Cadbury execs have said publicly that they see Hershey as a better fit than Kraft.

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Filed at 4:20 a.m. ET

CHICAGO/LONDON (Reuters) – Members of Cadbury Plc’s board have been talking with counterparts at Hershey Co as expectations fade for a significantly higher bid from Kraft Foods Inc .

Cadbury is not only seeking a higher price than Kraft’s $16.8 billion (10.5 billion pound) hostile offer, but also a merger partner that would let the British chocolatier have some say in a combined company, two sources familiar with the discussions told Reuters.

“As they go through this process, they feel as though they want to have a management say in the organization and I think that they perceive that one of the suitors is better than the other,” one of the sources said.

Hershey has struggled for weeks to decide whether to take the risk of bidding for a company more than twice its size. However, even if it does not make an offer, the specter of a rival adds pressure on Kraft, which has until January 19 to raise its offer.

At this point, the decision “is in Hershey’s court,” according to a second source.

Hershey and Cadbury are already partners. They each hold the licenses to market the other’s products outside their domestic markets. The family-built companies share other similarities, including a history of charitable involvement in their communities.

Kraft has been betting against a rival bid emerging. On Tuesday the company raised the cash component of its offer, without changing the price.

Within hours, it drew a rare public show of opposition from Warren Buffett’s Berkshire Hathaway , its largest investor, over a proposal to float shares to fund the bid. The comments prompted a drop in Cadbury shares as investors questioned how much room Kraft had to sweeten its offer further.

Cadbury shares fell 0.9 percent to 771 pence on Wednesday, all but eliminating the premium between Cadbury’s shares and the value of the Kraft bid, which stood at 769p per share.

CADBURY: NO CHASE FOR WHITE KNIGHT

Cadbury said on Wednesday that the company was not looking for a white knight.

“We are focused on delivering value to our shareholders and unless and until we have a credible offer that adequately reflects the strength of this business, there is nothing to comment upon,” the company said in a statement.

A Hershey spokesman declined to comment.

Hershey and Cadbury had both been viewed as vulnerable since Mars Inc, the maker of M&Ms and Snickers, bought chewing gum maker Wm Wrigley Jr Co in 2008 to create the world’s largest confectioner. A tie-up with Cadbury has been seen as Hershey’s best chance to quickly move its business into faster growing markets outside of the United States.

Kraft said on Wednesday it had a 1.52 percent take-up from Cadbury shareholders for its bid by a first closing deadline of 1300 GMT on January 5.

It said the cash and shares bid, currently worth 769 pence per share, remained open until February 2. Investors are still hoping Kraft will improve the terms to 800 pence or more by January 19.

Kraft did receive some good news on its bid, with the European Commission giving conditional approval to the deal, as long as Kraft would divest Cadbury’s Polish and Romanian chocolate businesses.

Hershey and Italy’s Ferrero, which have both publicly expressed interest in Cadbury, have until January 23 to put in a competing offer.

Cadbury is expected to pre-release its 2009 results on January 12 and has until January 15 to give some further financial details.

(Reporting by Brad Dorfman. Writing by Michele Gershberg. Editing by Robert MacMillan and Tim Dobbyn)

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The Associated Press

OMAHA, Neb. — Berkshire Hathaway Inc.’s Vice Chairman Charlie Munger has donated stock worth nearly $2.4 million.

The Pasadena, Calif., billionaire disclosed the charitable donations of 24 Class A Berkshire shares Wednesday in a filing with the Securities and Exchange Commission.

The shares were selling for $99,510 early Wednesday afternoon.

Eight shares went to the exclusive Harvard-Westlake college prep school that Munger has previously supported.

The other eight donations were of two shares each to charitable trusts that Munger had set up.

After the donations, Munger owned 13,157 Class A shares of the Omaha-based company, worth $1.3 billion.

CEO Warren Buffett says he consults Munger on every major move Berkshire makes.

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1/7/2010 12:15 AM ET



(RTTNews) – Symetra Financial Corp., a life insurance company, revealed in an amended filing with the U.S. Securities and Exchange Commission that it estimates pricing its initial public offering of 27 million shares of its common stock in the range of $12 to $14 per share.

Bellevue, Washington-based Symetra is selling 17.25 million shares and selling stockholders are offering 9.74 million shares in this offering. Symetra said it has applied to list its common stock on the New York Stock Exchange under the symbol “SYA”

Symetra currently expects the proposed maximum aggregate offering price to be $434.7 million, including 4.05 million shares issuable upon exercise of underwriters’ over-allotment option. The company had earlier estimated maximum proceeds of $575 million from the offering.

The company also clarified that it will not receive any proceeds from the sale of shares by selling stockholders. The net primary proceeds from the offering is expected to be approximately $208.3 million, with the company planning to use it for general corporate purposes.

Merrill Lynch, Pierce, Fenner & Smith Inc., J.P. Morgan Securities Inc., Goldman, Sachs & Co. and Barclays Capital Inc. are acting as joint book-running managers and as representatives of underwriters.

According to the filing, Warren Buffett’s Berkshire Hathaway Inc. (BRKa: News ), White Mountains Insurance Group, Ltd., Franklin Mutual Advisers, LLC, Caxton Associates LP, Vestar Capital Partners and Highfields Capital Management LP hold notable stakes in the company.

Assuming full exercise of over-allotment option, Berkshire and White Mountains each will beneficially own 21.8% stake after the offering. The two largest stockholders each owns 26.88 million shares of the company.

For the nine months ended September 30, 2009, Symetra posted net income of $96.2 million and generated total revenues of $1.27 billion, compared to $27 million and $1.1 billion, respectively, in the same period in 2008.

With Symetra expected to be the first company to come public in 2010, the IPO market started its count of expected rollouts. Pittsburgh, Pennsylvania-based DynaVox Inc., a provider of speech generating technology, and Beijing-based IFM Investments Ltd., a provider of real estate services, are waiting in the wings following their IPO filings.

DynaVox, which plans to sell up to $125 million worth of Class A common stock, intends to list its stock on the NASDAQ Global Market under the symbol “DVOX”, and IFM Investments, which estimates to sell up to US$184 million worth of ADSs, plans to list on the New York Stock Exchange under the symbol “CTC”.

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By Jamie McGee and Michael Tsang

January 06, 2010, 06:52 PM EST

Jan. 6 (Bloomberg) — Warren Buffett’s Berkshire Hathaway Inc. and White Mountains Insurance Group Ltd., the two largest shareholders in insurer Symetra Financial Corp., won’t cut their stakes when the company sells stock to the public this year.

Berkshire and White Mountains led the investor group that formed the life and health insurer in 2004 and each will keep their 26.9 million common shares when the company completes a planned initial public offering, Bellevue, Washington-based Symetra said today in a registration statement. Symetra said in previous regulatory filings that the companies might sell their stakes, which each equal 26 percent of existing shares.

“It’s certainly a vote of confidence regarding Warren Buffett’s long-term view of the business,” said Paul Bard, vice president of research at Renaissance Capital, an IPO research firm in Greenwich, Connecticut. “When he makes an investment call, investors take notice.”

Stock picks by Buffett, the second-richest American, are watched by mutual funds and individuals hoping to duplicate his investing success. Omaha, Nebraska-based Berkshire kept its stake in Verisk Analytics Inc. when that company went public in October, while other owners such as American International Group Inc. and Travelers Cos. sold shares. Verisk, which sells actuarial data to insurers, has jumped 39 percent.

Symetra may be the first U.S. IPO in 2010, data compiled by Bloomberg show. The insurer plans to raise as much as $434.7 million in an initial public offering of 31 million shares, today’s filing said. The target figure was scaled back from a planned sale of as much as $575 million that had been listed in a Dec. 29 registration statement.

‘A Great Sign’

Investors formed Symetra in 2004 by buying insurance and investment units from Safeco Corp., the property insurer bought by Liberty Mutual Group Inc. in 2008. Berkshire’s decision to retain the shares is “a great sign,” said Francis Gaskins, president of IPOdesktop.com in Marina del Rey, California.

“The fact that he is holding his stock is a definite plus,” Gaskins said. “It gives the institutional investors a feeling of security.”

Berkshire, where Buffett is chairman and chief executive officer, typically gets about half its profit from insurance units including General Re Corp. and car insurer Geico Corp. Symetra has reinsurance agreements with General Re, sold medical and life protection with Berkshire’s MidAmerican Energy Holdings Co. in 2006, and provided part of the coverage for Berkshire’s Nebraska Furniture Mart last year, today’s filing said.

Owning Berkshire Shares

Symetra’s life unit held $3.6 million in Berkshire Class B shares on Sept. 30, the company said in the filing. Buffett didn’t respond to a request for comment sent in an e-mail to assistant Carrie Kizer. Eric Brielmann, a spokesman for White Mountains, declined to comment.

Symetra estimated it would have a so-called tangible book value, a measure of shareholder equity that excludes assets that can’t be sold in liquidation, of $12.42 a share after the offering and assuming an IPO price of $13.

At that share price, Symetra would be valued at 1.05 times tangible book value, a premium to the median of 0.97 for 24 life insurers traded in the U.S., data compiled by Bloomberg show.

U.S. companies may raise as much as $50 billion through IPOs this year, more than triple last year’s tally, according to an estimate by London-based Barclays Plc.

Bank of America Corp., JPMorgan Chase & Co., Goldman Sachs Group Inc. and Barclays Plc are co-managing the Symetra stock sale.

–With assistance from Dakin Campbell in San Francisco. Editors: Erik Holm, Dan Reichl

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By JOANN S. LUBLIN And ANJALI CORDEIRO

Irene Rosenfeld, chief executive officer of Kraft Foods Inc., made known her intent to buy Cadbury PLC back in September. But she failed to keep Warren Buffett, her biggest shareholder, on her side for an open-ended hostile pursuit of the British confectioner.

Ms. Rosenfeld saw her efforts take an unexpected turn Tuesday, when Mr. Buffett’s holding company, Berkshire Hathaway Inc., said publicly it would vote against her plan to issue new stock to pay for a Cadbury acquisition and urged other shareholders to vote “No” as well.

According to a Rosenfeld acquaintance, the CEO alerted fellow board members Tuesday morning, just before Berkshire Hathaway, which owns 9.4% of Kraft, released a statement laying out its objection to the share-issue plan, which it fears is a “blank check.” Some directors were shocked to hear about the critique from the investing guru, the acquaintance said.

The hostile takeover attempt has shaped up to be the most ambitious—and diciest—move of Ms. Rosenfeld’s three and a half years atop the giant U.S. food company. Her position will be tested Feb. 1, when investors vote on her plan to issue stock to fund the deal, currently valued at more than $16 billion.

Ms. Rosenfeld and Mr. Buffett have spoken frequently since she began the Cadbury takeover battle last fall, and she likely will reach out to him to discuss his latest objections, the acquaintance predicted.

Mr. Buffett declined to comment.

Kraft said Ms. Rosenfeld wasn’t available for comment, but she released a prepared statement saying, that since September shareholders have “consistently expressed agreement regarding the compelling strategic logic for this combination.”

She added, “Our shareholders, including Warren Buffett, have said they’d like to see less stock in the offer. Cadbury shareholders have also expressed interest in seeing less stock, and more cash, in the offer. That’s why we announced an additional cash component [Tuesday]. Because we were able to address both company’s shareholder concerns, our announcement was well-received by the market.”

On Tuesday, Kraft had said it was sweetening the cash portion of its bid—although not the overall total price—with the proceeds from a deal to sell off its frozen-pizza business to Nestlé SA for $3.7 billion.

Kraft shares have risen on Mr. Buffett’s statement, which mitigated worries that Kraft might overextend itself to buy Cadbury. (A rival bidder, such as Hershey Corp., could still surface.)

Kraft said it believes its shareholders will approve the issuance of shares needed to complete the transaction. Berkshire Hathaway has said if it decides at some point the offer does not destroy value for Kraft shareholders it will change its vote to “Yes.”

Separately, the European Commission on Wednesday said a Kraft purchase of Cadbury wouldn’t hurt competition as long as Cadbury’s Polish and Romanian chocolate businesses are sold off, a remedy Kraft had proposed.

Tuesday’s rebuke by Mr. Buffett was a detour in a relationship that appeared to get off to a good start. Mr. Buffett built up his stake after Ms. Rosenfeld took over as CEO. A former Kraft executive who has worked with Ms. Rosenfeld said Mr. Buffett was unlikely to have taken such a large position in the company if he didn’t think highly of her management style. And even before the Cadbury bid, Ms. Rosenfeld and Mr. Buffett long had “a pretty good flow of information” between each other, the acquaintance recollected.

Some other Kraft stockholders share Mr. Buffett’s reservations. Kevin Rendino, who oversees the BlackRock Basic Value fund, said in an interview last month that he was taken aback when Kraft unveiled the bid and wouldn’t want the company to raise its offer much more.

Mr. Rendino, whose fund held 4.5 million Kraft shares as of October, and other large shareholders have stayed silent since Mr. Buffet’s broadside, but their vote by the Feb. 1 deadline will signal the level of their confidence in Ms. Rosenfeld.

“The desire to continue expanding internationally is completely understandable,” said Tom Russo, a partner at Gardner Russo & Gardner, a former shareholder of Kraft and current holder of Cadbury and Berkshire Hathaway. “The question is, can she get it done?”

The 56-year-old Ms. Rosenfeld is a longtime Kraft veteran. She left Kraft in 2003 after being passed over for the post of co-CEO and went to PepsiCo Inc.’s Frito Lay unit the next year. Kraft brought her back as CEO in June 2006 to revive its flagging brands.

She quickly changed top management, boosted marketing and spent $7 billion buying Groupe Danone SA’s biscuit business.

Recent results at Kraft—the largest packaged food company in the U.S.—have been mixed. The company benefited in the recession, as consumers shunned restaurants and stocked their pantries with Kraft offerings such as Oscar Mayer deli meats and Jell-O. But Kraft in November lowered its outlook for sales growth in 2009, partly because it couldn’t keep raising prices, and still needs to build a bigger presence in emerging markets.

Ms. Rosenfeld’s position is insulated by the progress she has made shaping up the company. Kraft’s 12-member board is dominated by directors who joined since Ms. Rosenfeld took command, and she keeps directors informed with monthly calls even when formal board meetings aren’t scheduled, the acquaintance said. Ms. Rosenfeld took over as chairman in 2007.

In a September interview, Ms. Rosenfeld laughed off a question about how the Cadbury bid might affect her career, saying only that she was convinced Kraft had a strong future with or without Cadbury.

Daniel Morgan, a portfolio manager at Synovus Securities, which holds Kraft shares, said, “I don’t think her whole career hangs on getting this deal done but its major component of getting Kraft and the stock to faster earnings.”

Ms. Rosenfeld has won over difficult shareholders in the past. Two years ago, after activist investor Nelson Peltz built a position in Kraft stock, the company got his fund to agree not to boost its stake beyond certain levels by putting two independent directors endorsed by Mr. Peltz on the board.

Ms. Rosenfeld “handles pressure as well as [anyone] can handle it,” said James M. Kilts, a former Kraft executive who has known her since she joined General Foods Corp., its predecessor, in 1981. Mr. Kilts said he promoted her 10 times while they worked together. He is a founding partner of private-equity firm Centerview Partners, whose investment banking arm advises Kraft on Cadbury.

“She thinks things through before she makes a move,” Mr. Kilts said. “She’s impatient and demanding, but not impulsive.”

—Ilan Brat contributed to this article.

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Last update: January 6, 2010 – 8:53 PM

A federal judge granted Wells Fargo & Co.’s request to dismiss a 2008 lawsuit filed by Baltimore alleging the banking giant’s lending practices led to foreclosures that harmed the city. Baltimore accused Wells Fargo of making bad loans in black neighborhoods that resulted in widespread foreclosures, leading to millions of dollars in lost tax revenue and other costs. “From the beginning, we have consistently maintained that Baltimore’s economic problems could not be attributed to the small number of foreclosures Wells Fargo has done in Baltimore,” said Cara Heiden, co-president of Wells Fargo Home Mortgage. The decision is similar to those in other cases brought against lenders in Birmingham, Ala., and Cleveland, Ohio.

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Vincent Fernando | Jan. 6, 2010, 3:49 PM

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By JEFFREY MCCRACKEN, DANA CIMILLUCA And ILAN BRAT

Board members at Cadbury PLC, resisting a hostile takeover effort from Kraft Foods Inc., have held talks with board members at Hershey Co. to encourage a rival offer, several people familiar with the matter said.

Cadbury board members have told Hershey directors that they would support a bid from the Pennsylvania company and have provided some guidance on the kind of price that would draw board support, these people said.

“Cadbury wants a friendly deal, a white knight as an option, so there are ongoing, back-channel talks,” said one of these people.

Cadbury board members and Chief Executive Todd Stitzer have said publicly and privately that they see Hershey as a better fit than Kraft. At the very least, a Hershey bid could push Kraft to raise its own offer.

Conversations between the two sides have been going on for about a month, but they have become “more frequent and more open” in recent weeks, one of the people said.

In December, Hershey’s board formed a special committee of outside directors to examine an offer. Those directors don’t sit on the separate Milton Hershey School & School Trust board, which has voting control over the publicly traded company.

The conversations have gone on among board members, bypassing bankers and advisers to the companies, said three people familiar with the matter. It could not be determined which board members have been involved in the talks.

A public statement Tuesday morning by investor Warren Buffet, Kraft’s largest shareholder, that he wouldn’t support the issuance of new Kraft shares has “heartened” Hershey and its advisors that the company could make a competitive rival bid, said another person familiar with the matter.

“It gives them conviction they can win, that Kraft now has fewer degrees of freedom than previously thought,” said one person involved in the matter.

One person familiar with the matter cautioned that any talks between Cadbury and Hershey aren’t Detailed and that Cadbury’s primary interest is to remain independent. According to U.K. takeover rules, should Cadbury open its books to Hershey as part of such discussions, it would have to do the same for Kraft. Kraft and Cadbury are not currently in discussions, the person said, and the odds that Cadbury and Kraft will begin talking anytime soon about a friendly deal appear slim.

Though Cadbury officials have argued that Hershey and Cadbury would be a better operational and cultural fit, they stress that the final decision on any deal will simply come down to who offers the greatest value.

Michael Mitchell, a Kraft spokesman, said, “Currently we’re the only offer on the table. We’re not going to speculate about what others may or may not be doing.

Representatives for Cadbury, Hershey and the Hershey Trust declined to comment.

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Rarely does a rebuff from Warren Buffett do so much good. Yesterday, when the Oracle of Omaha, who is Kraft Foods’ largest shareholder, voted against the company’s issuance of stock to buy Cadbury (CBY), Kraft (KFT) stock went up 4.9%. Cadbury fell, on the logic that by tightening the leash on Irene Rosenfeld, Kraft’s CEO, she wouldn’t be able to sweeten Kraft’s price for the British-based candy giant.

The tug-of-wars–between Kraft and Cadbury and Rosenfeld and Buffett–are fascinating to watch. Having known both Buffett and Rosenfeld for many years, I’ll share three quick thoughts:

1. It’s really not so surprising that Buffett reined in Kraft’s ability to raise its bid for Cadbury. Buffett has a long history of making bids and sticking to them. Of course, this is Kraft’s acquisition, not Berkshire Hathaway’s (BRKA). But since Berkshire owns 9.4% of Kraft, clearly Buffett’s vote matters. And so does his advice.

2. Kraft’s Irene Rosenfeld is one of the most disciplined bosses around. She was trained and mentored decades ago by Jim Kilts, who ran Kraft and later Gillette, which he sold to Procter & Gamble (PG) in 2005. Buffett was a big owner of Gillette stock and a longtime fan of the Kilts’ style of leadership–aggressive but pragmatic, forthright but not flashy. That’s Rosenfeld’s style too.

3. An oddity in the latest twist in this four-month takeover drama: Kraft’s response to Buffett’s vote against issuing new shares. In a statement yesterday, Kraft called its stock “undervalued.” If Kraft stock really is worth more than the current price–just under $29–isn’t issuing new shares an unduly expensive way to pay for a global candy prize?

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Jan. 5, 2010, 5:31 PM William Wei

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BRUSSELS (Reuters) – The European Commission said on Wednesday it had given conditional approval for U.S. food group Kraft Foods Inc to take over British confectionery maker Cadbury.

The European Union executive said in a written statement the hostile bid was conditional on Kraft’s divestment of Cadbury’s Polish and Romanian chocolate confectionery businesses.

The combination of Kraft and Cadbury would create the world’s largest sweets, chewing-gum and chocolate group, overtaking Mars-Wrigley.

The Commission took its decision after Kraft, the maker of Dairylea and Oreo cookies, offered concessions last month to ease regulatory concerns that its bid for Cadbury could be anticompetitive.

“In view of the remedies offered, I am satisfied that the proposed takeover would not adversely affect competition anywhere in Europe and that consumers would not be worse off,” Competition Commissioner Neelie Kroes said.

The Commission made clear that while both Kraft and Cadbury were strong global players, Kraft was not so dominant in Britain and Ireland, where Cadbury is the market leader.

Kraft’s cash and shares bid is currently worth 767 pence or 10.5 billion pounds ($16.8 billion) for Cadbury, but under Britain’s takeover rules the U.S. group has until January 19 to raise its bid. Cadbury shareholders have until February 2 to make their choice.

Kraft said it had a 1.52 percent take-up from Cadbury shareholders for its hostile bid. But most shareholders are expected to wait to see if Kraft raises its bid before making their decisions.

Kraft said it had received the acceptances by its first closing date of 1300 GMT on January 5, but its offer remains open until 1300 GMT on February 2.

Kraft’s biggest shareholder, Warren Buffett, warned the U.S. group on Tuesday that he would vote against Kraft’s proposal to issue 370 million new Kraft shares to fund the bid unless he was convinced it did not destroy shareholder value.

Buffett’s intervention and Nestle’s decision on Tuesday not to bid for the British confectionery group pushed Cadbury shares lower and Kraft higher, narrowing the current bid premium to around 0.7 percent, from nearly 10 percent on Monday.

The purchase of Cadbury would help expand Kraft’s business into faster-growing and higher-margin markets such as India.

(Writing by Timothy Heritage, editing by Luke Baker)

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BOSTON (Reuters) – After a tumultuous year that saw General Electric Co (GE.N) stock tumble to 18-year lows, then whipsaw back to triple that level, shareholders of the largest U.S. conglomerate may be in for a year of few, if any, gains.

GE Chief Executive Jeff Immelt last month told investors he expects profit at the company’s big industrial units — which make jet engines and electric turbines — to be “in a word, flat,” which aptly describes GE’s overall 2010 prospects.

Sluggish demand for heavy equipment and the hangover of the credit crunch on its hefty finance arm could set the stage for little movement in GE shares, investors said.

“They’re going to continue to struggle. From an earnings standpoint, they can certainly get some wind behind them on the industrial side. Things will be tougher on the financial side,” said Peter Klein, senior portfolio manager at Fifth Third Asset Management in Cleveland, Ohio. Referring to the stock, he added, “It’ll go sideways for a while.”

The Fairfield, Connecticut-based blue-chip company’s portfolio will be in flux this year, as its deal to sell a majority stake in its NBC Universal media business to No. 1 U.S. cable operator Comcast Corp (CMCSA.O) faces regulatory scrutiny and the company continues to pare back its GE Capital finance unit.

Wall Street analysts, on average, have a 12-month price target of $18 on GE shares, according to Thomson Reuters I/B/E/S. That represents a 16 percent rise from the stock’s current level at around $15.50.

PORTFOLIO NOISE

While GE’s equipment arms have strong growth prospects in emerging markets, including China, India and the Middle East, their performance will be offset by continued concerns about other business units, investors said. That marks a contrast to more focused industrials, including United Technologies Corp (UTX.N) and Caterpillar Inc (CAT.N), which have outperformed GE and the broader market over the past year.

GE shares are currently trading at about 15.5 times forecast earnings, a premium to the forward price-to-earnings ratio of 13.5 for the Dow Jones industrial average .DJI but a discount to Caterpillar’s 29.5 and United Technologies’ 17.2.

Wall Street also expects profit growth from those companies this year, with analysts forecasting a 35 percent profit rebound at Caterpillar and a 12 percent rise at United Tech.

Worries about GE’s finance arm have been the main drag on the stock, which tracked the financial sector closely during its heavy slide in the early part of 2009. Further scaling back finance and selling NBC could prompt investors to shift focus off GE Capital — which is facing rocky going in its commercial real estate portfolio — and on to the better-performing industrial units.

“As they grow the infrastructure business and shrink the rest of the portfolio, it will start trading more like an industrial,” said Matt Collins, capital goods analyst at Edward Jones, in St. Louis. “That strategy is already in place.”

GE management has begun telling Wall Street that the company is no longer in a defensive position financially and is interested in buying back the preferred shares it sold in 2008 to Warren Buffett’s Berkshire Hathaway Inc (BRKa.N), though its earliest opportunity to do so is October 2011.

In the meantime, the big risks the company faces — apart from another sharp slump in the global economy — are a further downturn in the commercial real estate sector and arduous new regulations on GE Capital.

“The good news, bigger picture, is that the key risks are better understood now versus a year ago,” said Collins. “You have to have a longer-term focus to want to own this stock. You’re looking at flat earnings this year, while the typical industrial will be up.”

Having a flat run ahead puts long-term GE shareholders in a familiar position. The stock showed little movement through the middle years of the past decade.

Some shareholders are questioning how much growth the stock could experience once it puts the downturn behind it.

“Is it still going to face that conglomerate discount?” asked Peter Sorrentino, senior vice president and portfolio manager at Huntington Asset Advisors in Cincinnati, which holds GE shares. “We think it’s cheap relative to its intrinsic value. In the mid-$20s, we might be looking to sell out and move on. In terms of real growth, we’ve been looking elsewhere.”

(Reporting by Scott Malone; editing by John Wallace)

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David Jones

LONDON (Reuters) – Kraft faced pressure to raise its bid for Cadbury with extra cash as the market digested Tuesday’s warning from key investor Warren Buffett and an initial deadline passed with few of the UK confectioner’s shares changing hands.

The U.S. food group said on Wednesday it had a 1.52 percent take-up from Cadbury shareholders for the 10.5 billion pound ($16.8 billion) hostile bid by a first closing deadline of 1300 GMT (8 a.m. EST) on January 5.

It said the cash and shares bid, currently worth 767 pence per share, remained open until February 2, but analysts said Kraft would have to improve the terms to 800 pence or more to stand a chance of success.

Most investors will likely be waiting until a January 19 deadline for Kraft to raise its bid before deciding whether to accept.

“Kraft will have to offer at least 810 pence to attract acceptances,” said analyst Dirk Van Vlaanderen at Jefferies International.

Buffett’s warning, which coincided with Swiss food group Nestle’s announcement it would not make a rival bid, pushed Cadbury shares lower and Kraft stock higher as it raised the chance of Cadbury escaping and cut the chance of Kraft overpaying in an auction.

Buffett said on Tuesday his Berkshire Hathaway investment group would vote against Kraft’s proposal to issue 370 million new Kraft shares to fund the bid unless he was convinced it did not destroy shareholder value.

MORE DEBT, LESS EQUITY

Analyst Martin Deboo at Investec Securities said Buffett’s message was not to kill the deal but for Kraft to use more debt than shares to fund it, and he believes there is a 50:50 chance between Kraft winning with a bid of 820p and that of Cadbury escaping.

“We read Berkshire not as trying to impose a veto, but challenging Kraft’s management to back their convictions with more cash and less equity,” Deboo said.

Cadbury shares closed off 0.9 percent at 772 pence.

Martin Dolan at Execution Research said Buffett’s comment show the conflict between him and Kraft, and the latter will have to offer over 800p to encourage Cadbury to let Kraft see its books and says Kraft could pay an extra 60p per share.

Buffett’s intervention and Nestle’s decision has narrowed the premium of Cadbury’s share price to the bid price to around 0.7 percent from nearly 10 percent on Monday.

Under Britain’s takeover rules, Kraft has until January 19 to raise its bid while Cadbury shareholders have until 1300 GMT on February 2 to accept.

Potential bidders for Cadbury who have expressed an interest publicly, Hershey and Italy’s Ferrero, have until January 23 to come up with fully financed bids or withdraw.

Cadbury has until January 12 to come up with fresh information to defend itself against the Kraft bid when it is expected to pre-release its 2009 results, but has gained a three-day extension to January 15 to give some further financial details.

(Reporting by David Jones; Editing by Dan Lalor, John Stonestreet)

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Wednesday, January 6, 2010

Berkshire Hathaway’s Geico insurance unit does not have to pay overtime to auto adjusters, an appeals court ruled, reversing a lower court’s decision.

The U.S. Court of Appeals for the District of Columbia said Tuesday that the adjusters can be classified as “administrative employees” who are exempt from federal rules requiring time and a half for hours worked beyond 40 per week.

“The primary duty of Geico’s auto-damage adjusters includes the exercise of discretion and independent judgment, and thus they come in within the administrative employee exemption” of the federal Fair Labor Standards Act, Circuit Judge Karen L. Henderson wrote for the three-judge panel.

The decision may help chief executive Warren Buffett contain costs at Chevy Chase-based Geico, one of more than 70 Berkshire subsidiaries that sell products that include Fruit of the Loom underwear and Dairy Queen ice cream. Company executives have cut jobs and closed plants at some Berkshire businesses as demand slowed in the recession. Berkshire is based in Omaha. (Buffett is a director of The Washington Post Co. and the largest non-family shareholder.)

Hundreds of auto-damage adjusters in New York and other states sued Geico, claiming the company improperly denied them overtime benefits. A district judge sided with the employees in December 2008, saying they lacked the decision-making authority to qualify as administrative employees.

The workers, one of at least three categories of employees who may service an auto claim, each handle more than 1,000 claims a year, totaling more than $2.5 million, on average, court records show. Geico supervisors initial each estimate and review some claims, though not until the claim is paid.

The amount of discretion the adjusters have in determining the payouts without direct supervision qualifies these jobs for the exemption to the overtime rule, Henderson said in her opinion, reversing the lower court.

“The district court had no occasion to decide whether the job of a Geico auto damage adjuster is so easy a caveman could do it,” Henderson wrote in a footnote, referring to the company’s ubiquitous advertising campaign.

The case is Robinson-Smith v. Government Employees Insurance Co., 08-7146.

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Kraft sweetened its $16.8 billion offer for Britain’s Cadbury and a potential rival stood aside, but just hours later the U.S. food firm’s influential top shareholder threatened to vote against the deal.

Switzerland’s Nestle ruled itself out of any bid war as Kraft [KFT 28.98 0.21 (+0.73%) ], North America’s biggest food group, raised the proportion of cash in its hostile bid — an attempt to sway shareholders in the British chocolate maker.

AP Cadbury Bar

The plan appeared to give Kraft the upper hand, but then 9.4 percent shareholder Warren Buffett weighed in to warn he may vote against the deal, sending Cadbury shares [CBY 49.4766 -0.2534 (-0.51%) ] lower and Kraft stock higher.

Buffett’s Berkshire Hathaway [BRK.A 99660.00 -50.00 (-0.05%) ] investment group said it had voted “no” to Kraft’s proposal to issue up to 370 million new Kraft shares to help fund a Cadbury takeover, but may change its vote if it concludes that the offer does not destroy value for Kraft shareholders.

The highly influential Buffett — known as the Sage of Omaha for his investment expertise — said Kraft’s share issuance proposal gives it a “blank check” allowing the group to change its offer for Cadbury.

“If Buffett votes against something — that carries a great deal of weight with other shareholders… When he says no, no is what he says and means,” said Jerry Bruni, CEO and portfolio manager of J.V. Bruni and Co., based in Colorado Springs, Co.

Earlier, Kraft revised its 10.4 billion pound ($16.8 billion) bid, adding 60 pence cash per share to the offer to tempt shareholders in the maker of Dairy Milk chocolate and Trident gum, but cut the stock portion of the bid accordingly.

The extra cash brings the cash portion to 360p and is funded from a deal whereby Switzerland’s Nestle will buy Kraft’s North American frozen pizza business for $3.7 billion.

Kraft’s CEO Irene Rosenfeld has stuck to her guns since her initial approach to Cadbury in early September, determined not to overpay, and convinced that a rival bidder would not emerge and Cadbury’s share price would drift down, analysts said.

Cadbury renewed its rejection of the Kraft takeover bid, once again calling it “derisory,” and its chairman Roger Carr since his meeting with Rosenfeld last summer has led a frosty defense as he saw no reason to hold talks with Kraft.

Cadbury shares fell after Nestle, the world’s biggest food group, said it did “not intend to make, or participate in, a formal offer” for the British confectioner, and then dropped further after the Buffett’s warning.

They slipped as low of 760p before trading off 3.3 percent at 779p, compared with Kraft’s cash-and-share bid which valued Cadbury shares at 758p, with the bid premium narrowing to 2.7 percent from nearly 10 percent on Monday.

Kraft shares rose 3.4 percent to $28.37, reflecting views that there is less chance of a competitive auction.

“Nestle’s decision effectively leaves Kraft as the overwhelming front-runner….Nestle’s decision effectively removes Ferrero and Hershey [HSY 37.12 -0.05 (-0.13%) ] from the field as competitive forces,” said analyst Jeremy Batstone-Carr at Charles Stanley.

U.S.-based Hershey and Italy’s Ferrero expressed interest in bidding for Cadbury in November but they need to come up with fully financed bids by Jan. 23 to succeed under British rules. Analysts had expected Nestle might team up with Hershey, while Ferrero was seen as needing financial help.

Many analysts and investors still expect Kraft will need to pay 800 pence per share or above to win over Cadbury.

‘One-Horse Race’

“The (Nestle) decision not to pursue Cadbury was always clear despite market speculation to the contrary. Now it’s in the open,” said independent analyst James Amoroso. “The Cadbury race is a one-horse race. Now Kraft has some more cash to put behind the bid.”

Kraft said the move was made “because of the desire expressed by some Cadbury security holders to have a greater proportion of the offer in cash” and because some of its own shareholders had asked it to use fewer Kraft shares.

Cadbury was defiant.

“Kraft has once again missed the point. Despite this tinkering, the value of the Kraft offer remains unchanged and derisory with less than half the consideration in cash,” a spokesman told Reuters.

Kraft said it would give detailed terms of the alternative by Jan. 19, the last day it is allowed to amend its offer under British takeover rules. The U.S. food maker also extended its deadline for shareholders to accept its offer to Feb. 2.

Cadbury shareholders have said in the past that a bigger cash portion would help, but one investor was unimpressed by the new proposal on Tuesday.

“This doesn’t really change anything. It was never really the form of the deal that was the problem, it was always the price,” said a top 20 Cadbury investor.

Pricey Pizzas

Nestle said the frozen pizza business it was buying from Kraft — which had 2009 sales of $2.1 billion and includes the DiGiorno, Tombstone and Jack’s brands — would boost its earnings per share in the first full year of ownership and that synergies, at an estimated 7 percent of sales, would be fully realised within five years.

“Nestle’s acquisition of the Kraft pizza business is certainly not a cheap one,” said Richard Withagen, analyst at SNS Securities who has a ‘reduce’ rating on Nestle shares and a price target of 44 Swiss francs. “While the company has a strong track record in realizing synergies, it needs them to make this deal value accretive.”

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Warren Buffett

Try as they might to put on a brave face, Kraft [KFT 28.9506 0.1806 (+0.63%) ] management cannot be pleased that Warren Buffett chose to go public with his opposition to the company’s plan to issue up to 370 million shares to facilitate the purchase of Cadbury [CBY 49.46 -0.27 (-0.54%) ].

Yes, Buffett’s opposition is actually proving helpful to Kraft’s bid, given its stock is going up due to the perception that Mr. Buffett’s opposition will limit Kraft’s use of its shares and Cadbury’s is declining due to worries that his pressure will forestall a higher bid from Kraft.

And yes, it’s true that Buffett did not say he’s opposed to a purchase of Cadbury, only the free hand being given Kraft to change its offer for Cadbury in any way it wishes from the transaction presented to shareholders in the proxy Kraft recently filed.

Buffett has also long made a case for stronger corporate governance and this gives him another chance to further that cause and argue that Kraft’s stock is cheap.

Still, it can’t be a good day for Kraft CEO Irene Rosenfeld when she wakes up to find out her largest shareholder (Berkshire [BRK.A 99610.0078 -99.99 (-0.1%) ] has a 9.4% stake in Kraft) is issuing a press release questioning the strategy for a career betting deal. This is not something that Buffett typically does. It’s hard to imagine Buffett has not spoken with Rosenfeld about his concerns and so one must assume that he wasn’t fully satisfied with her answers.

Buffett and others at Berkshire are not elaborating on why the release was issued now, as opposed to after it is made clear to both Cadbury and Kraft shareholders what the final bid for Cadbury will look like (we’ll know that by January 19th which is the deadline for Kraft under U.K. takeover law) and therefore how much stock will be issued.

Perhaps Buffett acted now because he may not have a vote later. People close to this deal tell me that if it so desires Kraft could increase the cash portion of its bid (without endangering its investment grade credit rating), while decreasing the stock portion, so that it would not be issuing more than 20% of its outstanding shares and therefore no longer be required to hold a shareholder vote. In two weeks we’ll find out.

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Normally folksy Warren comes down hard on Kraft’s plan to issue 370m shares

Kraft’s $10.4 billion bid is so close to Cadbury’s current value as to be neglible, so some analysts believe Buffett’s public opposition to Kraft issuing shares to finance the deal is simply his way of driving Cadbury’s price lower. And indeed, after his warning, Cadbury fell 3.2 per cent to 779p in London.

Buffett’s Berkshire Hathaway is, after all, Kraft’s biggest shareholder and the US company appears so committed to acquiring Cadbury that it is selling off profitable assets, including its frozen pizza division to Nestle, at reduced prices to raise money. Buffett, it turns out, wins both ways: he holds a stake in Nestle, too.

So it seems Buffett may not be the harmless, folksy granny-tickler he likes to portray and he’s certainly not above manipulating situations to his advantage. In the past, Buffett’s been a vocal dissenter on Coca-Cola’s board when directors were looking at a $15.3 billion bid for Quaker Oats. Yet rarely does he do it so publicly.

And where the ‘Sage of Omaha’ leads, others follow: “If he says no, everybody else is going to pile on and say no too,” explains Justin Fuller, a partner at Midway Capital Research & Management who runs the buffettologist.com website.

Yet could there be something else going on? Warren Buffett has an ego the size of one of the freight locomotives on the Burlington Northern Santa Fe, the railway operator he bought for $44bn last year. Many think he overpaid.

Last year, he delivered his worst performance compared to the S&P 500 index in a decade. Berkshire’s value rose just 2.7pc on the New York Stock Exchange compared with a 23 per cent gain in the Standard & Poor’s 500 Index, according to Bloomberg. In other words, he’s got something to prove and buying Cadbury is not, he’s telling Kraft’s management, the way he wants to go.

Not that Cadbury shareholders should care – they’ve consistently signalled they won’t accept the current offer. The company, too, is unimpressed, saying in a very British way yesterday that it still considers the American company’s offer “derisory”.

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By Michael Corkery

• January 5, 2010, 10:16 AM ET

Investors in London and New York are handicapping the Cadbury takeover drama as the dust settles from this morning’s whirlwind of news.

The short of it: Kraft Foods has improved its chances of acquiring Cadbury, but only at the right price.

Cadbury shares are down nearly 4%, to 770 pence on the London Stock Exchange, as investors digest news that one possible white horse bidder–Nestle–is out of the running and Kraft’s largest shareholder, Warren Buffett’s Berkshire Hathaway, is opposed to Kraft issuing new shares for an acquisition.

In a statement, Buffett says he isn’t against a deal, but he isn’t willing to give Kraft the ability to overpay for Cadbury by issuing 370 million new shares.

The result: Kraft’s shares rose 3% on the New York Stock Exchange this morning, as Buffett’s statement eased concerns that existing Kraft shareholders would be diluted from the large share issuance and that Kraft would overpay for Cadbury –a concern that has weighed on Kraft’s share price since the takeover battle began late this summer.

Buffett’s move could have the double-barrel effect of making a deal more palatable to Kraft shareholders and to Cadbury shareholders. Kraft’s current offer is a mix of cash and stock. The more Kraft shares rises, the more valuable its bid becomes. Kraft also this morning pumped more cash into its offer, making it a 50-50 stock-cash mix up from 60-40 stock and cash).

While Kraft sweetened its bid today by tweaking the cash-and-share mix, it hasn’t raised the price from its original 740 pence-a-share offer, which explains the fall in Cadbury shares. They had been trading above 800 pence for several months in anticipation of a higher bid from Kraft or another company.

As for Nestle’s exit, it “reduces the likelihood of a successful counterbid scenario” writes Jefferies & Co. analyst Simon Marshall-Lockyear in a research note. He said the most likely counterbid to Kraft’s offer would come from Nestle teaming up with Hershey.

With Nestle out and a lone Hershey bid seeming more unlikely, Marshall-Lockyear downgraded Cadbury to hold from “buy” and reduced his expectation for a deal price to 810 pence from 945 pence.

Kraft may yet bump up its bid, but the Kraft management and Buffett, continue to play this chess game cautiously. This morning’s moves by Kraft could be the check before the checkmate.

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By Michael Corkery

• January 5, 2010, 12:30 PM ET

Warren Buffett has made it clear that he opposes Kraft Foods issuing new shares at the current price to finance an acquisition of U.K. confectioner Cadbury.

Buffett, whose Berkshire Hathaway owns 9.4% of the U.S. food and beverage conglomerate, said he thinks Kraft’s shares are undervalued, making them an “expensive” currency to use for a bid.

In fact, Buffett has long been wary of using stock to acquire companies. Deal Journal dug up this passage from Roger Lowenstein’s 1996 biography, “ Buffett: The Making of an American Capitalist,” in which the Oracle of Omaha sounds off on companies that used stock for acquisitions during a wave of M&A during the early 1980s.

Citing a 1982 letter to Berkshire’s shareholders, Lowenstein explains that Buffett thought CEOs ought to think of stock deals as their selling part of the company in order to acquire another. Here’s the relevant passage:

“With the issuance of new shares, each outgoing stockholder would up owning proportionally less of the company than before . The CEOs disguised this fact by using the language of a buyer: ‘Company A to Acquire Company B.’ However, ‘clearer thinking about the matter would result if a more awkward but more accurate description were used: ‘Part of A sold to Acquire B.

“Why was this disguise employed? Most stocks, including most acquirers stocks, were cheap. In such a case, an acquiring CEO was shopping with an unattractive currency, like an American in Paris when the dollar was undervalued. ….

“Buffett suggested that such managers and directors could ’sharpen their thinking’ by asking if they would be willing to sell all of their company on the same basis as they were selling part of it. And if not, why were they selling part of it.”

Fast forward to Buffett’s statement today on Kraft’s Cadbury bid. He thinks Kraft is undervalued considering where its shares were trading when the company did a big share buyback in 2007 :

“Kraft spent $3.6 billion to repurchase shares at about $33 per share, presumably because the directors and management thought the shares to be worth more,’’ according to Berkshire Hathaway. “Does the board now believe those purchases were a mistake and that Kraft’s true value is only the current price of $27 per share — and that it is therefore fine to structure a major acquisition based upon that price?”

Indeed, Kraft’s price to earnings ratio of 17.51 lags behind that of rivals PepsiCo (P/E of 18.60) and even that of the much smaller Hershey (P/E of 21.77), though Kraft has a higher P/E than consumer product conglomerate Proctor & Gamble’s 14.27.

Thus, if Kraft management had to answer Buffett’s 1981 question about whether it was a good time to sell the whole company, the answer would probably be no. Buffett says he isn’t opposed to a deal for Cadbury. Raising $3.7 billion in cash from the sale of its pizza business and lifting the cash component of its Cadbury offer may have helped alleviate some of Buffett’s concerns. Now Kraft just needs its share price to rise and help do the rest of the work of making the bid more attractive to Cadbury’s shareholders.

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