Hostile Takeover- M&A - Grade: A+ PDF

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Hostile Takeover of KRAFT by Cadbury...

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Table of Contents INTRODUCTION

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WHAT IS HOSTILE TAKEOVER? ABOUT KRAFT ABOUT CADBURY

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THE HOSTILE TAKEOVER: KRAFT FOODS ACQUIRING CADBURY

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POST ACQUISITION

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CONCLUSION

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Introduction What is Hostile Takeover? A hostile takeover is the acquisition of one company (called the target company) by another (called the acquirer) that is accomplished not by coming to an agreement with the target company's management, but by going directly to the company's shareholders or fighting to replace management in order to get the acquisition approved. A hostile takeover can be accomplished through either a tender offer or a proxy fight.

The key characteristic of a hostile takeover is that the target company's management does not want the deal to go through. Sometimes a company's management will defend against unwanted hostile takeovers by using several controversial strategies including the poison pill, crown-jewel defense, golden parachute, pac-man defense, and others.

About Kraft Kraft Foods Group, Inc., was an American manufacturing and processing conglomerate headquartered in the Chicago suburb of Northfield, Illinois. The company was restructured in 2012 as a spin off from Kraft Foods Inc., which in turn was renamed Mondelēz International. The new Kraft Foods Group was focused mainly on grocery products for the North American market, while Mondelēz is focused on international confectionery and snack brands. Until the merger with Heinz, Kraft Foods Group was an independent public company listed on the NASDAQ stock exchange. On July 2, 2015, Kraft completed its merger with Heinz, arranged by Heinz owners Berkshire Hathaway and 3G Capital, creating the fifth largest food and beverage company in the world, Kraft Heinz Company.

About Cadbury Cadbury is a British multinational confectionery subsidiary company wholly owned by American

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company Mondelēz International since 2012. It is the second largest confectionery brand in the world after Wrigley's. Cadbury is headquartered in Uxbridge, Greater London and operates in more than fifty countries worldwide. Cadbury was established in Birmingham, England in 1824, by John Cadbury who sold tea, coffee and drinking chocolate. Cadbury merged with J. S. Fry & Sons in 1919, and Schweppes in 1969. Cadbury was a constant constituent of the FTSE 100 on the London Stock Exchange from the index's 1984 inception until the company was bought by Kraft Foods in 2010.

The Hostile Takeover: Kraft Foods acquiring Cadbury In 2009, US food company Kraft Foods launched a hostile bid for Cadbury, the UK-listed chocolate maker. As became clear almost exactly two years later in August 2011, Cadbury was the final acquisition necessary to allow Kraft to be restructured and indeed split into two companies by the end of 2012: a grocery business worth approximately $16bn; and a $32bn global snacks business. Kraft needed Cadbury to provide scale for the snacks business, especially in emerging markets such as India. The challenge for Kraft was how to buy Cadbury when it was not for sale.

On September 7, 2009, Kraft made a £10.2 billion takeover offer for the long-established British confectionery group Cadbury, makers of Dairy Milk and Bournville chocolate. On November 9, 2009 Kraft's £9.8bn takeover bid was rejected by Cadbury. Cadbury stated that the takeover bid was a "derisory" offer. Kraft renewed the offer under the same terms on December 4, 2009. The offer generated significant political and public opposition in the United Kingdom and abroad, even leading to calls for the government to implement a policy of economic protectionism in cases of takeovers of large companies. Not only was Cadbury not for sale, but it actively resisted the Kraft takeover. Sir Roger Carr, the chairman of Cadbury, was experienced in takeover defences and immediately put together a strong defensive advisory team. Its first act was to brand the 745 pence-per-share offer “unattractive”, saying that it “fundamentally undervalued the company”. The team made clear that even if the company had to succumb to an unwanted takeover, almost any other confectionery company (Nestlé, Ferrero and Hershey were all mentioned) would be preferred as the buyer. In addition, Lord Mandelson, then the UK’s 4

business secretary, publicly declared that the government would oppose any buyer who failed to “respect” the historic confectioner.

Cadbury’s own defence documents stated that shareholders should reject Kraft’s offer because the chocolate company would be “absorbed into Kraft’s low growth conglomerate business model – an unappealing prospect that sharply contrasts with the Cadbury strategy of a pure play confectionery company”. Little did Cadbury’s management know that Kraft’s plan was to split in two to eliminate its conglomerate nature and become two more focused businesses, thereby creating more value for its shareholders. On January 19, 2010, Cadbury finally approved a revised offer from Kraft, valuing the confectionery business at $19.5 billion (£11.5 billion). The funding for the takeover was partially provided by the Royal Bank of Scotland, the British part-state-owned bank. The Cadbury team determined that a majority of shareholders would sell at a price of roughly 830 pence a share. A deal was struck between the two chairmen on January 18 2010 at 840 pence per share plus a special 10 pence per share dividend. This was approved by 72 per cent of Cadbury shareholders two weeks later.

Post Acquisition Cadbury sales were flat after Kraft’s acquisition. Despite the Cadbury takeover helping boost sales by 30%, Kraft's net profit for the fourth quarter fell 24% to $540m due to costs associated with integrating the UK business after the acquisition. Kraft spent a one-time $1.3 billion in integration costs to achieve $675 million in recurring annual synergy savings by the end of 2012 (estimated). Kraft was forced to increase prices to offset rising commodity costs in North America and Europe. Kraft has had to contend with the higher cost of ingredients such as corn, sugar and cocoa.

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Conclusion In any takeover, especially a cross-border deal in which the acquired company is as well known as Cadbury was in the UK, the transaction will be front-page news. In this case, it was the lead business story for at least four months. Fortunately, this deal had no monopoly or competition issues, otherwise those regulators could also have been involved.

But aside from any regulators, most other commentators will largely be distractions. It is important for the acquiring company’s management and advisers to stay focused on the deal itself and the real decision-makers – the shareholders of the target company. As this deal demonstrates, these shareholders may not (and often will not) be the long-term traditional owners of the target company stock, but rather very rational hedge funds and other arbitrageurs (in Cadbury’s case, owning 31 per cent of the shares at the end), who are swayed only by the offer price and how quickly the deal can be completed.

Other stakeholders may have legitimate concerns that need to be addressed but this can usually be done after the deal is completed, as Kraft did.

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