Buffett slams Kraft’s Cadbury deal

Posted by Daniel Palmer on 21st January 2010

Kraft Foods’ largest shareholder Warren Buffett has labelled the company’s proposed acquisition of Cadbury a “bad deal” in a withering attack on US television.

Billionaire Buffett, who owns around 10% of Kraft, questioned the US food giant’s revised offer for Cadbury, which values the UK confectioner at GBP11.5bn (A$21b).

Kraft yesterday raised its bid for Cadbury after a previous GBP10.5bn failed to win over the Dairy Milk maker’s board.

Buffett said he had “a lot of doubts” about the deal, including the use of new Kraft shares to part-fund the takeover, a move that the investor criticised earlier this month.

The chairman and CEO of investment vehicle Berkshire Hathaway claimed the value of Kraft’s takeover bid was higher than management claimed and compared unfavourably to the price the food group secured from selling its pizza business to Nestle two weeks ago.

“There are two things that caused me to feel poorer,” Buffett told business TV channel CNBC. “Kraft sold a very fine pizza business and they said they got $3.7bn for it but, because there it had practically no tax basis, they really got $2.5bn – so they sold that at right around nine times pre-tax earnings.

“Kraft mentioned paying 13 times EBITDA for Cadbury but they are paying more than that. For one thing, EBITDA is not the same as earnings. Depreciation is a very real expense. On top of that, they’ve got US$1.3bn they are going to spend on various rearrangements of Cadbury. They’ve got $390m of deal expenses. They are using their own stock that their own directors say is significantly under-valued and when they calculate that 13 they are calculating Kraft at market price not at what their own directors think the stock is worth.”

Buffett added: “The actual multiple, if you look at the value of the Kraft stock is more like 16 or 17, and they sold earnings at nine times. It’s hard to get rich doing that.”

The investor cannot block Kraft’s move to Cadbury. Buffett’s Berkshire Hathway planned to vote against the US group’s original plan to issue as many as 370m new shares to fund its Cadbury deal.

However, Kraft’s revised, increased offer includes a higher proportion of cash and less shares – eliminating any need for shareholder approval for the deal to go ahead.

Buffett insisted he would have voted against Kraft’s new offer if he had the chance, although he played down the prospect of selling his shares in the Milka and Toblerone chocolate maker.

“They needed the vote originally… they took that away. If I had a chance to vote on this, I’d vote no,” Buffett said. “Kraft has got a wonderful portfolio of businesses, including their pizza business, which Nestle now has but … I’d love to own Oreo cookies personally.

“I think Irene has done a good job in operations. I like Irene. She’s been straight-forward with me – we just disagree. She thinks this is a good deal, I think it’s a bad deal. I think she’s a perfectly decent person. She could be a trustee under my will. I just don’t want her making this particular deal.”

However, he added: “I think Kraft is still under-valued. I just don’t think it is as under-valued as it was three weeks ago. Kraft was significantly under-valued it;s just less under-valued because it’s issuing a bunch of stock at a cheap price and it’s paying a full price [for Cadbury] and it’s sold a good business. I thought it was worth a lot more than $27 or $28.”

In the wake of Buffett’s comments, Kraft defended its offer. “We respect Buffett’s opinion – he’s one of our largest investors. We think this is a good deal for us. It transforms our portfolio for better long term growth,” a Kraft spokesperson said.

However, Kraft’s shares were down 2.6% at $28.66 after Buffett’s remarks, which were not the only sign of investor unease at yesterday’s transatlantic deal.

Cadbury’s second-largest investor, Legal & General, said the increased and final offer by Kraft failed to “fully reflect the long-term value of the company”.

“We are disappointed management have recommended the offer for this iconic and unique British company, but are grateful for the constructive way they have engaged with us,” a spokesperson said.

just-food is the world’s leading portal for the global pre-packaged food and retail industries. Its daily mix of breaking news, views, analysis and research serves over 100,000 food executives each month. http://www.just-food.com/