Why Kraft wants Cadbury's secrets

Share

A few weeks ago, Kraft Foods Inc. chief executive officer Irene Rosenfeld called up Roger Carr, chairman of Cadbury PLC, and suggested they get together because she happened to be in Britain. Mr. Carr agreed and the two met at his office in London early on Aug. 28.

Ms. Rosenfeld was blunt. Cadbury could no longer make it as a standalone company and a merger with Kraft offered the best alternative for the British confectionery giant, which traces its roots back nearly 200 years. She then outlined a stock and cash takeover proposal worth close to $17-billion (U.S.) and followed up later that day with a letter reiterating her points.

Mr. Carr was not convinced. A few days later, Cadbury's board rejected the offer. And now Kraft's decision to take the case directly to investors by making its offer public is likely to set off a massive bidding war for Cadbury that will radically transform the $50-billion confectionery industry.

Kraft's announcement caused a frenzy in the food sector Tuesday, when financial markets in North American opened after the Labour Day weekend. Stock prices of several food companies soared, including shares of H.J. Heinz Co., Campbell Soup Co., Kellogg Co. and General Mills Inc.

Most analysts are predicting a joint offer from Nestlé SA and Hershey Co., and it's expected that Kraft will increase its bid.

Kraft's offer "looks like an opening gambit," Warren Ackerman, an analyst at London-based Evolution Securities, wrote in a report Tuesday. "It is highly likely that Kraft will up their offer or at the very minimum increase the cash element up from the 40-per-cent limit."

Ms. Rosenfeld declined to comment when asked during a conference call Tuesday about a sweetened offer, saying only that Kraft would be "disciplined" in its approach.

Mr. Ackerman said there is about a 40-per-cent chance that Nestlé and Hershey will team up. Due to antitrust issues, Nestlé would likely take Cadbury's gum business, which includes Trident, and leave Hershey the chocolate operations. Nestlé officials declined comment but the company said Monday that it was "open to acquisition opportunities."

If Kraft succeeds in acquiring Cadbury, the maker of Kraft Dinner, Maxwell House coffee and Oreo cookies will vault from a bit player in the candy and gum business to the world leader commanding 15 per cent of the global market.

It would also give Kraft entry into several developing markets, such as India, where it has limited presence. Kraft generates 60 per cent of its total sales from North America and only 20 per cent from developing countries. By contrast, 40 per cent of Cadbury's sales come from fast-growing emerging markets.

Buying Cadbury would also further an ambitious restructuring Ms. Rosenfeld launched shortly after becoming Kraft's CEO in 2006. She has shed unproductive divisions, such as Post cereals, and made several acquisitions, including spending $7-billion on the biscuit division of Paris-based Groupe Danone SA. She has also pushed to broaden the company's distribution network to get beyond grocery stores and into convenience stores, dollar stores and gas stations.

The moves have helped improve Kraft's financial fortunes and won praise from analysts. Kraft's profit climbed 10 per cent in each of the past two quarters, although revenue fell.

"Now is the time to further accelerate our transformation," Ms. Rosenfeld told analysts Tuesday.

Cadbury has been in Kraft's sights for a while, but the merger took on new urgency after last year's $23-billion purchase of Wm. Wrigley Jr. Co. by Mars Inc.

That deal gave Mars a commanding number one position in the global confectionery business and a dominant slice of the lucrative gum market. Sales of chewing gum have risen faster than every other segment of the candy market in the past five years, thanks mainly to health-conscious consumers who are worried about obesity and opting for sugar-free gum.

The Mars-Wrigley deal also left Cadbury as one of the few standalone players in the industry, something Ms. Rosenfeld noted in Tuesday's conference call with analysts. She said Kraft has seen widespread consolidation among its customers, suppliers and competitors in recent years. "Scale has been and will continue to be an important factor," she said.

For Cadbury, the offer comes at a tricky time. After facing years of griping from investors and analysts, the company's American CEO, Todd Stitzer, embarked on an ambitious restructuring program 18 months ago called Vision into Action. The plan has resulted in the closing of several factories and 7,500 job cuts.

For now, Cadbury's board said it is "confident in Cadbury's standalone strategy ... and the continued successful delivery of its Vision into Action plan."