Kraft and Cadbury

Kraft and Cadbury

Chocs away

Kraft wins a battle for Britain’s Cadbury and will become the world’s biggest confectioner

THE intervention of a government minister in Kraft’s battle to buy Cadbury says much about the strength of British feeling for their favourite chocolate-maker. The American food giant’s sweetened offer, too toothsome to turn down, was accepted by Cadbury’s board on Tuesday January 19th. Kraft will pay £11.9 billion ($19.4 billion) for Cadbury in cash and shares, some 50% more than the firm’s value before the bidding started in September. Yet last week Britain’s business secretary, Lord Mandelson, warned a big group of the country's institutional investors—doubtless fixing those from Cadbury with a narrowed eye—against the dangers of short-termism.

A month earlier he had promised Kraft that the British government would scrutinise a foreign buyer to ensure that “respect” was paid to Cadbury’s proud heritage. The firm has been catering to the British for 186 years. In a country that cheerfully waves in foreign buyers for its businesses the threat of “huge opposition” from the government was an unusual change of tone. Kraft too received some words of wisdom on its attempted takeover from a senior American, although the advice of Warren Buffet was of a more practical kind. His investment firm, Berkshire Hathaway, is a big shareholder in Kraft. Reckoning that Kraft’s shares are undervalued he counselled the firm’s bosses not to let their “animal spirits run high” and overpay for Cadbury.

Irene Rosenfeld, Kraft’s chief executive, seems to have listened. Shortly before a deadline imposed by British takeover rules, Kraft upped its bid for Cadbury by boosting the cash portion significantly while reducing from 370m to 265m the number of new shares it will issue to complete the deal. Kraft’s share price got a well-timed boost last week after the firm forecast that its profits for 2009 would be even better than earlier expected.

Ms Rosenfeld was quick to acknowledge on Tuesday that Kraft has “great respect for Cadbury's brands, heritage and people”. Perhaps that will allay Lord Mandelson’s fears. Cadbury's unions opposed the move, worried about job cuts, but the firm's board has reasoned that the price is right to bring together the two companies to create the world’s biggest confectioner. Earlier the board had insisted that Cadbury was better off alone. Now Cadbury will become part of the “global powerhouse” that Ms Rosenfeld envisages.

The two businesses are strong in different markets. Kraft has little presence in Britain’s confectionery market, where Cadbury is strong, but it has thriving businesses in mainland Europe, where Cadbury has made few inroads. Cadbury has a booming chewing-gum business, particularly in Europe and Latin America, an area where Kraft has little expertise. And between them they can make up lost ground in China, where Mars, the world’s second-placed sweet-maker when the deal goes through, holds the upper hand. The deal is also set to yield cost savings of $675m a year.

Other potential bidders still have the chance to make a more appealing offer but it seems that Kraft’s touted rivals will remain silent. America’s Hershey, smaller even than Cadbury, seems unlikely to be able to muster the financial forces to upset Kraft’s bid. Nestlé ruled itself out of the running by after buying Kraft’s American Pizza business for $3.7 billion early this month.

Ms Rosenfeld may yet find the takeover of Cadbury a tricky process. In dealing with potential rivals, satisfying Cadbury’s board and soothing Mr Buffet, Kraft’s boss has proved she is a deft operator. If Lord Mandelson is harder to assuage she might try sending him a Chocolate Orange.