Acquisition of Cadbury by Kraft: How Sweet is this Deal?

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Case Details:

Case Code : FINC076
Case Length : 18 pages
Period : 2010-2011
Pub. Date : 2012
Teaching Note : Available
Organization : Kraft Foods, Inc.; Cadbury Plc.
Industry : Food
Countries : Global; US; Europe

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"Cadbury has got a good price for the business and Kraft will get a very good return. Our strategy was very clear. We put in an offer in September, but we knew that it would take an eye wateringly high price to get Cadbury to the table. We opted to play a slow game." 1

-- An adviser of Kraft Foods Inc., in 2010.

"If I had a chance to vote on this, I'd vote no. [Irene Rosenfeld] thinks it's a good deal; I think it's a bad deal." 2

-- - Warren Buffet, Chairman of Berkshire Hathway, Inc. in 2010.

In 2011, one year after the Kraft-Cadbury merger, Kraft Foods Inc.'s (Kraft) geographical distribution showed an improvement with developing markets contributing close to 30% of sales (vs. 10% in 2001). Cadbury, however, was not meeting Kraft Foods Inc.'s (Kraft) top line growth objectives and was behind in its debt reduction plans. The amount of debt on Kraft's balance sheet increased to US$28 billion from US$27.4 billion a year earlier.3 Earlier, on January 19, 2010, the US-based Kraft announced a hostile takeover of the UK-based Cadbury Plc (Cadbury) for 11.9 billion (US$19.7 billion). This merger was recognized as one of the biggest cross-border acquisitions of 2010. The takeover strategy was initiated in September 2009 by Kraft which wanted to become a global market leader in confectionery and chocolate markets.

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The acquisition of the 186-year-old Cadbury led to Kraft becoming the world's biggest chocolate and confectionery producer. The Kraft-Cadbury amalgamation created a portfolio of 81 confectionery and chocolate products. In fact, a few of the premium products in the portfolio were expected to generate a revenue of US$1 billion per annum. After succeeding in her mission, Irene B. Rosenfeld (Rosenfeld), CEO of Kraft, said, "With such a powerful array of household-name products, Kraft and Cadbury make for truly a transformational combination." 4

This agreement followed a four-month war of words between Cadbury Chairman Roger Carr and Rosenfeld. The deal was approved by the Cadbury board on the strength of Kraft's offer that each shareholder would be paid 840 pence (US$13.70) per share and would also be authorized to receive special dividends of 10 pence per share, so that the total payment for each Cadbury share would be 850 pence.5 The news of the acquisition was greeted with skepticism in some quarters with industry observers questioning the value of the Cadbury takeover.

Background Note - Next Page>>

1] Jonathan Sibun, "Cadbury Takeover: A Crafty Bit of Business or an Overpriced Confection?", January 20,2010.
2] Matt Andreczak, "Kraft CEO must Show Buffett the Merits of Cadbury Deal,", January 20, 2010.
3] Lalit Sharma, "Warren Buffett's Top 5 Holdings: Are They Right for You?", July 4, 2011.
4] David Lieberman and Matt Krantz, "Is Kraft's $19B Cadbury Buy a Sweet Deal? Buffett has Doubts,", January 20,2010.
5] Simon Kennedy, "Kraft to Buy Cadbury in Friendly $19.5 billion Deal,", January 25, 2010.

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