The merger between Kraft Foods Inc. (KFT) and Cadbury plc (CBY) just got more interesting on about three fronts this morning. The deal was already deemed a full-price offer, which in street terms means it was expensive. But Kraft has sold its North American frozen pizza operations to Nestle for about $3.7 billion in cash, and the company is turning around and using this cash to boost the cash portion of its Cadbury acquisition. Yet the real wrench in the merger machine might be coming from Kraft’s largest and most notorious shareholder, Berkshire Hathaway Inc. (BRK.A).
First and foremost, the increased bid from Kraft for Cadbury is a cash component increase rather than an outright increase, at least according to the initial reports. All $3.7 billion will be used to increase the cash portion of the offer. As part of the deal, this also removes Nestle as a bidder for Cadbury as many had expected that Nestle might try to get involved in that deal. Cadbury’s response was that the cash element is still subpar and the offer “remains derisory.”
Perhaps the biggest wrench in the machine comes from Warren Buffett and friends over at Berkshire Hathaway Inc. (BRK.A). The company issued a statement this morning saying that it has voted “no” on Kraft’s proposal to authorize the issuance of up to 370 million shares to facilitate the acquisition of Cadbury. Many interpreted this as an effort from Buffett to block the merger, but that is actually not the case. The real opinion from Berkshire is that this share-issuance proposal would effectively give Kraft a blank check and could allow Kraft to make whatever additional changes it wants to make in this merger hunt.
Berkshire also is calling the Kraft stock undervalued in a sense, because it is saying that the common stock is a very expensive currency as it spent $3.6 billion in 2007 to repurchase shares at about $33 per share. What Buffett did not mention was that Kraft as a stock has been dead money over its entire life after Philip Morris, or Altria (MO).
Kraft has until January 19, 2010 to finalize its offer. Berkshire Hathaway only voted against the increased share issuance today and stated that it may vote yes formally after it determines whether or not this destroys share value or not. Buffett had already tipped his hand that the deal was a “full-price offer” when the deal started to break.
So what is really important here is to take out a few issues. Cadbury shares are down over 3% at 778.50 pence in London trading today. Nestle was likely to have antitrust issues galore if it wanted to get in the deal, but this will now raise the price of poker in this merger. The mere notion that Kraft is willing to pony up more cash via an asset sale signals that it wants to go after Cadbury.
Italy’s Ferrero is still listed as a potential buyer of interest. Hershey (HSY) is also said to be a contender, but Hershey will have to do a club-deal with partners as its market capitalization is $8.25 billion. Hershey also shares the notion that its stock has been dead money for more than five years, and it is questionable as to how and where the company could come close to raising enough capital to do anything other than a group-led acquisition rather than a standalone acquisition.
Cadbury’s share drop is due to the notion that the stock in London has traded at a deal-premium already. Fewer buyers won’t drive that stock much higher. The real issue to consider is Kraft’s share price gain of more than 2.5% this morning. Kraft has not been able to get the ship going in the right direction yet, and selling off assets and leveraging up to make a strategic merger might add more risk than upside.
