Bold investor attempts to prevent Kraft’s management from acquiring Cadbury

The most renowned investor of today, Warren Buffett, has announced that as the largest shareholder, he disagrees with the acquisition of British Cadbury. At the same time, he is engaging in the purchase of the American railway company Burlington Santa Fe for $26 billion.

writes Amir Kulenović
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When Warren Buffett, one of the gurus of value-oriented investing, gives his opinion on a stock or sector suitable for investment, almost all global markets react immediately in accordance with his thoughts. When he does this regarding a company in which his firm Berkshire Hathaway holds the largest individual stake, the company’s management generally has no choice but to heed his remarks if they do not want to incur the wrath of other shareholders.

This is exactly what happened in recent days when Buffett strongly opposed Kraft Foods’ decision, the second-largest company in the food and beverage sector in the world (Nestlé holds the first place), to acquire the English company Cadbury for $17 billion. Buffett, who is generally not prone to such a mode of communication, publicly stated that Cadbury as a target for acquisition is too big a bite for Kraft and that he will not give his consent for the acquisition. Given that Berkshire Hathaway holds more than nine percent of Kraft’s shares, this statement resonated strongly in the American investment community, which is why the management of the company led by Irene Rosenfeld is now seeking a way to explain to shareholders how the acquisition will result in an increase in Kraft’s value and an increase in its market share. Kraft has recently concluded a deal with its largest competitor, Swiss Nestlé, for the sale of the division that produces frozen pizza in the U.S. for $3.7 billion. This money will help him bolster the original offer that Cadbury rejected, considering that the price does not correspond to the company’s value. Additionally, Kraft intends to raise the remainder by issuing more than 300 million new shares, which is also the main reason for Buffett’s opposition to the acquisition.

Who are the other players
Buffett acquired his stake in Kraft during the crisis of 2008 at an average price of $30 per share. Given that the company, in its share buyback program, was buying those shares for $33, Buffett believes they are worth that much, so by issuing a new series of shares, Kraft would undervalue itself. At the same time, Cadbury has begun to bid with other potential buyers and convince its shareholders that merging with Kraft is not in their interest. Nestlé, as the most likely potential buyer, has publicly dismissed interest in the British company, but American Hershey and Italian Ferrero have shown interest, albeit only declaratively. At the same time, Cadbury has recently announced its business results for 2009, which show that the company has improved its profitability indicators.

Analysts consider Buffett’s move to be quite unusual for his investment style and believe that if he persists in such a stance, he could lead other shareholders to follow suit and thus undermine Kraft’s management efforts. In his long investment history, Buffett has made a similar move only once, when he withheld his vote from Coca-Cola’s management regarding the acquisition of Quaker Oats in 2000. His opposition as Coca-Cola’s largest shareholder was enough for the company to abandon the purchase, and Quaker Oats was ultimately sold to its competitor Pepsi. Although Kraft’s initial offer for Cadbury was smoothly rejected, the company has until January 19 to amend its offer and convince its own shareholders that the acquisition, which would give Kraft total annual revenues exceeding $50 billion, will yield positive synergistic effects for the company and the value of its shares. Ferrero and Hershey may only serve to bolster the offer in this whole story, but that is not certain, so it may happen that one of those companies soon puts a concrete offer on the table and thus disrupts Rosenfeld’s plans, where Buffett’s opposition as the largest shareholder is a sufficiently complicating factor.

The purchase begins
All investors can be pleased that Buffett, who is one of the few investors whose word carries global weight, has focused on acquiring undervalued companies, which is a sign that the crisis is coming to an end. Although he opposes Kraft’s intentions, he himself is currently engaging in a large acquisition and proposing a move unique in Berkshire Hathaway’s corporate history. Berkshire’s shares are known for having the highest individual value of all listed on global stock exchanges (in 2007, one was worth over one hundred thousand dollars) and for the fact that Buffett has never made a split to facilitate their trading. Thus, Buffett wants to finance the purchase of 77 percent of the shares of the railway company Burlington Santa Fe for $26 billion, which is one of the largest stock market transactions in recent years. In addition to the fact that the most renowned investor of today is engaging in a purchase, analysts consider his decision somewhat controversial. Thus, Buffett indirectly acknowledged that he thinks the shares of his company Berkshire Hathaway are currently overvalued and that it is wiser to finance the acquisition through recapitalization rather than seeking money from banks.

Moreover, his moves in the past month give clear signals that the market is returning from a phase of confusion and disorientation that prevailed after the collapse of the global financial system to somewhat calmer times. Although Kraft may think that Buffett is complicating their attempts to pull the company out of the crisis even stronger, this shareholder battle is quite different from those that took place when the crisis was at its peak. Namely, the crisis caused panic among investors and greed for profit at any cost, mainly under pressure to abandon unprofitable parts of the company without insisting on maintaining long-term value. Now, however, things are slowly changing.