Gustavo Ballvé on January 26th, 2010
Corporate Strategy, Food for thought, Food, beverage and tobacco, Home, Industries

Kraft’s all-out effort to acquire Cadbury involved a “side deal” in which Nestlé bought Kraft’s frozen pizza division. One company had cash on hand and served as “white knight”, the other had a pressing need and none other than Warren Buffett applying pressure. We think it’s safe to assume that Nestlé got a sweet deal…

There was also an interesting (but misguided) issue raised about Buffett’s stance in this deal versus Berkshire’s bid for Burlington – see inside.

Kraft’s management was in a bit of a quandary last month. Because its original offer to buy Cadbury involved issuing stock representing more than 20% of its shares outstanding, the company needed shareholder approval to close the deal as per NYSE’s rule 312.03(c). Warren Buffett, Kraft’s largest shareholder, didn’t like the idea and said that Kraft’s stock was an expensive currency to use at that time. In a very public way, he declared a “no” vote on the issuance and recommended that other shareholders do the same. Given Buffett’s reputation, this was a very credible threat.

To steer away from him, Kraft needed desperately to raise enough cash to be able to cut the share issuance below the 20% threshold, thus avoiding the need for a shareholder vote. That’s where Nestlé came in. Over a weekend the company switched from being a competing bidder for Cadbury, to “helping out” Kraft by acquiring the company’s frozen pizza business. It’s reasonable to suppose that it got a good deal. Not only does it know the ins-and-outs of the food business, but it had the money on hand to act quickly – especially after the sale of Alcon to Novartis. Buffett’s commentary that the pizza sale was badly structured fiscally for Kraft only adds to the impression that the Kraft-Cadbury deal was a “marriage done at gun point”, rushed due to competition or perceived competition for Cadbury, where “minor details” were ignored in view of the bigger objective.

Could this be a “shotgun wedding”?


Does Buffett’s vote on Kraft mean that Berkshire is fully valued? – Bloomberg, Jan. 11th 2010 – If Kraft’s shares are “very expensive currency” and Berkshire is using BRK stock in its bid for Burlington Northern, does it mean that Buffett thinks Berkshire shares are even better valued than Kraft’s? Not necessarily is the obvious answer. Buffett has always said that to pay for an acquisition with shares he must be getting more than what he’s giving away. He is therefore implying that this is happening in his bid for Burlington, while from the press release linked above it’s clear that he thinks that this is not the case in Kraft’s bid for Cadbury. Each deal must be analyzed separately.

LEX on Kraft/ Cadbury – Financial Times, Jan. 19th 2010 – LEX columns are a significant part of the’s value proposition and we highly recommend ponying up the cash for it. There’s a short video we couldn’t embed here and links to other LEX pieces on the subject.

Buffett’s Lost Vote – NYT’s DealBook blog, Jan. 21st 2010 – For an explanation in layman’s terms of the NYSE rule that would require shareholder approval for Kraft’s original bid for Cadbury.

Tags: , , , , , , , ,

Comments are closed.

Back to last page or go to the home page