{"id":220463,"date":"2010-01-23T18:32:00","date_gmt":"2010-01-23T23:32:00","guid":{"rendered":"tag:blogger.com,1999:blog-3087194156628161158.post-7587892626289562647"},"modified":"2010-01-23T18:44:29","modified_gmt":"2010-01-23T23:44:29","slug":"dailymail-co-uk-why-warren-buffett-believes-cadburys-sale-is-a-lousy-deal-for-kraft-shareholders-read-more-httpwww-dailymail-co-uknewsarticle","status":"publish","type":"post","link":"https:\/\/mereja.media\/index\/220463","title":{"rendered":"DAILYMAIL.CO.UK: Why Warren Buffett believes Cadbury’s sale is a lousy deal for Kraft shareholders Read more: http:\/\/www.dailymail.co.uk\/news\/article"},"content":{"rendered":"

By Alice Schroeder, Warren Buffett’s Biographer<\/span><\/p>\n

Last updated at 10:01 PM on 23rd January 2010<\/p>\n

<\/p>\n

\"Warren <\/p>\n

Warren Buffett: Agreed share price is ‘a bad deal’<\/p>\n<\/div>\n

Warren Buffett told the business TV channel CNBC<\/a> on Thursday that the 850p a share Kraft agreed to pay for Cadbury is a \u2018bad deal\u2019 and, given a chance, he would vote against it. <\/p>\n

From the perspective of a Cadbury shareholder, this dismissal from the American investment genius \u2013 and Kraft\u2019s biggest single shareholder \u2013 may seem astonishing.<\/p>\n

Cadbury\u2019s iconic status in Britain parallels Coca-Cola\u2019s status in the US.<\/p>\n

Buffett, 79, one of the world\u2019s richest men, is a longtime Coca-Cola share-holder. He knows the value of the customer loyalty expressed in the UK anger at the prospect of the Cadbury sale.<\/p>\n

And he\u2019s a chocolate aficionado \u2013 I\u2019ve often seen him enjoy eating it at his desk at breakfast time. <\/p>\n

He has studied the business of confectionery ever since he first traded cocoa futures in the Fifties.<\/p>\n

Chocolate offers what Buffett calls a \u2018durable competitive advantage\u2019: a protective moat filled with customer loyalty which rivals cannot get across to storm a business\u2019s castle walls.<\/p>\n

Confectionery has few peers for such product loyalty. This is why, in 1971, Buffett\u2019s investment firm Berkshire Hathaway bought See\u2019s Candies<\/a>, a luxury confectioner that dominates the market in California. He called it \u2018the prototype of a dream business\u2019.<\/p>\n

It is an all-weather product: people both celebrate and comfort themselves with chocolate. Importantly, it gives high cash-flows without requiring additional capital investment. Yet if Buffett is so fond of the business, why does he so dislike the Kraft takeover of Cadbury?<\/p>\n

He says the Cadbury deal makes him feel \u2018poorer\u2019. On the surface, this has to do more with Kraft\u2019s financial management. Yet it adds up to this: Buffett thinks Cadbury is not worth the price agreed.<\/p>\n

Kraft upset Buffett after it bought back its own stock at a higher price than the stock issued to buy Cadbury \u2013 buying dear and selling cheap. Buffett had harsh words, too, about Kraft\u2019s decision to sell its frozen pizza business to Nestl\u00e9 for an after-tax price of \u00a31.5billion.<\/p>\n

The cash Kraft received will help pay for Cadbury, but Buffett considers it a bad trade. <\/p>\n

Annual earnings for the pizza business amounted to 11 per cent of the sale price, by Buffett\u2019s estimate, whereas Cadbury\u2019s earnings will equate to 6.25 per cent. \u2018You don\u2019t get rich that way,\u2019 he said.<\/p>\n

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\"Cadbury's <\/p>\n

Poor returns: Cadbury’s earnings will equate to just 6.25 per cent of the sale price, said Buffett<\/p>\n<\/div>\n

<\/p>\n

Buffett has \u2018a lot of doubts\u2019 about the deal. Some must concern Kraft\u2019s \u00a320billion debt load, newly increased to pay for Cadbury. <\/p>\n<\/div>\n

The great investor also doubts Kraft CEO Irene Rosenfeld\u2019s ability. He complimented her as a business \u2018operator\u2019, implicitly criticising her as a financial manager.<\/p>\n

Buffett has a near-moralistic view of executives\u2019 duty to steward investors\u2019 money. Failure is, for him, a sin that could be termed \u2018theft by incompetence\u2019 (or indifference).<\/p>\n

He criticised Kraft directors for admitting their stock was under-valued only after he said so. He fears Rosenfeld succumbed to \u2018deal momentum\u2019 that drove up the price.<\/p>\n

That no other bid than Kraft\u2019s arose buttresses his view. However painful for fans of Cadbury, Kraft\u2019s bid was not \u2018derisory\u2019.<\/p>\n

Buffett stewards money by avoiding auctions and negotiating in private. He is utterly inflexible, waiting patiently for the other party to become desperate and talk his own price down. <\/p>\n

I call this \u2018Buffetting\u2019 the seller. We saw it in action during the financial crisis when only one investment bank, Goldman Sachs, dangled a high enough reward to make him bite on their stock, even though all of their peers were in danger of bankruptcy. Buffett has made an estimated \u00a32.5billion profit on that \u00a33billion deal.<\/p>\n

Of such discipline is Buffett\u2019s great fortune made. Behind it lies a mind incapable of succumbing to deal momentum over Cadbury. <\/p>\n

Case in point: when Buffett bought See\u2019s Candies, he would have walked had the seller wanted just \u00a360,000 ($100,000) more on a \u00a315million deal. Inflexibility over trivial amounts has saved him billions in losses over the years. <\/p>\n

With See\u2019s, it almost turned a triumph into one of Buffett\u2019s greatest mistakes. Could he be wrong this time?<\/p>\n

The way Buffett is talking about Cadbury, he doesn\u2019t seem to think the difference in value trivial here. Still, he says it takes five years to know whether a deal worked out. <\/p>\n

Until then, Cadbury fans, don\u2019t take Buffett\u2019s reaction personally.<\/p>\n

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