{"id":141129,"date":"2010-01-05T13:45:00","date_gmt":"2010-01-05T18:45:00","guid":{"rendered":"tag:blogger.com,1999:blog-3087194156628161158.post-6307718290688761467"},"modified":"2010-01-05T13:51:06","modified_gmt":"2010-01-05T18:51:06","slug":"financial-times-cadbury-gets-creamed-by-buffett%e2%80%a6","status":"publish","type":"post","link":"https:\/\/mereja.media\/index\/141129","title":{"rendered":"FINANCIAL TIMES: Cadbury gets creamed by Buffett\u2026"},"content":{"rendered":"

Posted by Neil Hume<\/strong> on Jan 05 13:41.<\/span> <\/p>\n

\u2026 who also delivers an almighty slapdown to Kraft.<\/p>\n

In early afternoon trading on Tuesday, shares in the UK confectioner were hit hard \u2013 falling over 4% to 770p<\/p>\n

\"\"<\/p>\n

The reason? Warren Buffett, who has thrown a rather big spanner in the works.<\/p>\n

From a statement<\/a> just released by Berskhire Hathway.<\/p>\n

\n

Omaha, NE (BRK.A; BRK.B)\u2014Berkshire Hathaway has voted \u201cno\u201d on Kraft\u2019s proposal to authorize the issuance of up to 370 million shares to facilitate the acquisition of Cadbury. Berkshire, taking into account both its own holdings and those of its pension funds, believes that the 138,272,500 Kraft shares it owns \u2013 9.4% of the total outstanding \u2013 make it the company\u2019s largest shareholder.<\/p>\n<\/blockquote>\n

\n

The share-issuance proposal, if enacted, will give Kraft a blank check allowing it to change its offer to Cadbury \u2013 in any way it wishes \u2013 from the transaction presented to shareholders in the proxy statement. And we worry very much that, indeed, there will be an additional change from the revision announced this morning. To state the matter simply, a shareholder voting \u201cyes\u201d today is authorizing a huge transaction without knowing its cost or the means of payment.<\/p>\n<\/blockquote>\n

\n

Our understanding is that Kraft must announce its final offer for Cadbury by January 19th. If we conclude at that point that the offer does not destroy value for Kraft shareholders, we will change our vote to \u201cyes.\u201d At this time, however, we believe no shareholder should vote \u201cyes\u201d when he can\u2019t possibly know what he is voting for.<\/strong><\/p>\n<\/blockquote>\n

Oh dear. This is very embarrassing for Kraft \u2013 its biggest shareholder is clearly not onside as far as the Cadbury bid goes.<\/p>\n

Buffett\u2019s beef is that Kraft shares are a very expensive acquisition currency.<\/p>\n

\n

What we know with certainty, however, is that Kraft stock, at its current price of $27, is a very expensive \u201ccurrency\u201d to be used in an acquisition. In 2007, in fact, 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.<\/p>\n

Does the board now believe those purchases were a mistake and that Kraft\u2019s true value is only the current price of $27 per share \u2013 and that it is therefore fine to structure a major acquisition based upon that price? Would the directors use stock as merger currency if the price were, say, $20 per share? Surely the true business value of what is given is as important as the true business value of what is received when an acquisition is being evaluated. We hope all shareholders will use this yardstick in deciding how to vote.<\/p>\n<\/blockquote>\n

And all this on a day when Kraft removed Nestle from the Cadbury auction with a neat side deal<\/a>.<\/a><\/p>\n

Of course, the sale of Kraft\u2019s North American North American frozen pizza business to the Swiss for $3.7bn goes some way to addressing Buffett\u2019s concern; Kraft is offering<\/a> Cadbury shareholders the option of receiving an extra 60p per share in cash instead of some of the Kraft shares.<\/p>\n

But it seems this is not enough, which raises the question of whether Kraft will be forced to make further disposals \u2013 its coffee assets for example \u2013 if it wants to secure Buffett\u2019s backing. Importantly, though, there is still time for Kraft to do this or at least make a commitment to do so.<\/p>\n

At the moment we don\u2019t know whether a Buffett \u2018no\u2019 vote can de-rail Kraft\u2019s bid for Cadbury, but this post will be updated when we do. That said, it is probably worth assuming that many Kraft shareholders will follow Buffett\u2019s lead.<\/p>\n

Of course this could all be irrelevant because if Kraft does not increase its offer Cadbury shareholders will probably vote \u2018no\u2019 as well.<\/p>\n

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