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Jan 31, 2010

M&A focus: Cadbury holds on but for how long?

Chocolate maker rallies support from investors and the general public

Todd Stitzer, the CEO of UK confectioner Cadbury, has said allowing his company to be bought by US food company Kraft would be like ‘taking a very fast sports car and putting it in a four-door sedan lane of traffic.’

Right now, however, it’s more like the sprightly TVR of Cadbury and the clunky Ford of Kraft have pulled over to the side of the road so the respective drivers can hurl abuse at each other.
One driver has been shouting much more loudly than the other, though. Kraft’s £9.8 bn ($15.7 bn) hostile bid for Cadbury arrived on December 4, 2009, following months of jostling for position by the two firms. This was met by a withering retort from Cadbury chairman Roger Carr, who said the new offer was an ‘even more unacceptable price from the same unappealing source.’

Cadbury continued the invective in its official defense document, which arrived on December 14, 2009. In it, the company upgraded its targets for the next four years. Carr also described Cadbury as a ‘particularly attractive asset in the sector with iconic brands, a sharp category focus and an enviable geographic.’

The chairman may have laid it on a bit thick, even for a confectioner. But he saved a short, sharp shot for the end: ‘Kraft is trying to buy Cadbury on the cheap to provide much needed growth to its unattractive low-growth conglomerate business model,’ he wrote. ‘Don’t let Kraft steal your company with its derisory offer.’

The following day, Kraft shot back a contemptuous response of its own. ‘We have heard nothing from Cadbury that surprises us,’ commented Kraft’s chairman and CEO Irene Rosenfeld.

Cadbury’s defense was generally well received by the market. ‘We will be raising our estimates for Cadbury in the wake of this robust defense,’ wrote Jeremy Batstone-Carr, analyst at UK shop Charles Stanley, in a note to clients. ‘We have consistently argued that Kraft will have to raise its offer aggressively, probably to 850p per share or more if it wishes to acquire the business.’

In the note, Batstone-Carr makes only a fleeting reference to Carr’s emotive words, noting that the chairman ‘unsurprisingly… reiterated his vigorous defense’. But the fact the words were in the note show the impact they are having in the wider public arena.

During the battle, Cadbury has successfully rallied shareholders, analysts, the press and even politicians to its cause through a trenchant defense. Even UK business secretary Lord Mandelson, a dedicated fan of the free market, recently said he would oppose buyers that do not respect Cadbury’s traditions.

A strong perception built up that Kraft needed more cash and better arguments to be successful and, in the end, Kraft did sweeten its bid. On January 5, 2010 it raised the cash portion of its offer by 60p a share following the sale of its Pizza business to Nestlé for a total of $3.7 bn. Nestlé also ruled itself out as a rival bidder for Cadbury. The market now views Cadbury’s independent future as being in the balance.

Difference in opinion

Value of Kraft's bid when made on December 4, 2009: 713p
Cadbury's share price at end of day on December 4, 2009: 795p
Source: Kraft and Cadbury