… who also delivers an almighty slapdown to Kraft.
In early afternoon trading on Tuesday, shares in the UK confectioner were hit hard – falling over 4% to 770p
The reason? Warren Buffett, who has thrown a rather big spanner in the works.
From a statement just released by Berskhire Hathway.
Omaha, NE (BRK.A; BRK.B)—Berkshire Hathaway has voted “no” on Kraft’s proposal to authorize the issuance of up to 370 million shares to facilitate the acquisition of Cadbury. Berkshire, taking into account both its own holdings and those of its pension funds, believes that the 138,272,500 Kraft shares it owns – 9.4% of the total outstanding – make it the company’s largest shareholder.
The share-issuance proposal, if enacted, will give Kraft a blank check allowing it to change its offer to Cadbury – in any way it wishes – from the transaction presented to shareholders in the proxy statement. And we worry very much that, indeed, there will be an additional change from the revision announced this morning. To state the matter simply, a shareholder voting “yes” today is authorizing a huge transaction without knowing its cost or the means of payment.
Our understanding is that Kraft must announce its final offer for Cadbury by January 19th. If we conclude at that point that the offer does not destroy value for Kraft shareholders, we will change our vote to “yes.” At this time, however, we believe no shareholder should vote “yes” when he can’t possibly know what he is voting for.
Oh dear. This is very embarrassing for Kraft – its biggest shareholder is clearly not onside as far as the Cadbury bid goes.
Buffett’s beef is that Kraft shares are a very expensive acquisition currency.
What we know with certainty, however, is that Kraft stock, at its current price of $27, is a very expensive “currency” to be used in an acquisition. In 2007, in fact, Kraft spent $3.6 billion to repurchase shares at about $33 per share, presumably because the directors and management thought the shares to be worth more.
Does the board now believe those purchases were a mistake and that Kraft’s true value is only the current price of $27 per share – and that it is therefore fine to structure a major acquisition based upon that price? Would the directors use stock as merger currency if the price were, say, $20 per share? Surely the true business value of what is given is as important as the true business value of what is received when an acquisition is being evaluated. We hope all shareholders will use this yardstick in deciding how to vote.
Of course, the sale of Kraft’s North American North American frozen pizza business to the Swiss for $3.7bn goes some way to addressing Buffett’s concern; Kraft is offering Cadbury shareholders the option of receiving an extra 60p per share in cash instead of some of the Kraft shares.
But it seems this is not enough, which raises the question of whether Kraft will be forced to make further disposals – its coffee assets for example – if it wants to secure Buffett’s backing. Importantly, though, there is still time for Kraft to do this or at least make a commitment to do so.
At the moment we don’t know whether a Buffett ‘no’ vote can de-rail Kraft’s bid for Cadbury, but this post will be updated when we do. That said, it is probably worth assuming that many Kraft shareholders will follow Buffett’s lead.
Of course this could all be irrelevant because if Kraft does not increase its offer Cadbury shareholders will probably vote ‘no’ as well.Share Investor Links
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