Kraft's bid hugely undervalues Cadbury

Allister Heath
IRENE Rosenfeld, Kraft’s boss, is pursuing a canny strategy. She knows that she cannot dramatically sweeten the value of her bid for Cadbury and therefore stands no chance of winning at the moment – after all, her biggest shareholder, the thrifty Warren Buffett, has told her to remain disciplined – so she is planning to buy time, just in case events come to her rescue.

By early next year, she is undoubtedly hoping, the FTSE may have slumped, Cadbury’s strong performance may have come unstuck or some of the more aggressive hedge funds that have bought into the British chocolate maker may chose to endorse her bid, faute de mieux. By then, she might also be able to raise her bid slightly and that, she hopes, could be enough to grab Cadbury, especially if the outlook for 2010 begins to darken again. After all, it is now clear that there are no White Knights are on the horizon, while a friendly merger with Hershey (as previously advocated by this column) is extremely unlikely.

Cadbury’s shareholders should not allow themselves to be duped by such a strategy. Yesterday’s stock and cash bid (717p a share at last count) was pathetic: not improving the offer from September’s original bid might have been calculated to spook shareholders or to signal Rosenfeld’s strength of character; but it massively under-values the UK firm. Kraft’s cheerleaders argue that Cadbury is only worth what somebody is willing to pay for it and point out that yesterday’s bid is still around a quarter higher than Cadbury’s pre-offer share price; but that is not the point. As Buffett knows, a firm’s intrinsic value is what matters; and the markets are right to dismiss out of hand anything under 800p a share. In fact, even 850p would still be way too low; I believe that Cadbury is worth more than £10 a share.

There has long been a tendency in the UK for businesses to be sold too easily or too soon. This is mainly true of smaller or newish firms; that is one reason why we have no British Google, Microsoft or eBay. But this is also true of old, long-established firms: cashing in by selling out is deemed easier than sticking around to build the business. British firms often also acquiesce far too easily to hostile takeovers. A culture of pure managerialism, as opposed to entrepreneurialism, reigns in too many boardrooms. Institutional investors, meanwhile, should learn from Buffett that a good money manager is one that is able to bring together rigorous financial analysis with an entrepreneurial, risk-taking streak.

The big institutions should make it clear to Cadbury that they expect the firm to work even harder to grow its market share while cutting costs – and then trust it with whatever rigorous, detailed plan it comes up with. It would make much more sense for them over the next five years that accepting a mix of lackluster, low-growth Kraft shares and a bit of cash.

Not all takeovers are bad – far from it. It many cases it does make sense for smaller firms to sell out – but only if it has become too difficult for them to grow independently and when there is clear value to be had by combining forces. Many of Cadbury’s past purchases, which transformed acquirer as well as acquiree, have been cases in point. But that certainly doesn’t apply to Cadbury itself, which has no need of Kraft to continue growing. In fact, the UK firm would probably be dragged down under Kraft’s ownership. Unless Rosenfeld massively increases her bid – and hikes the cash component – Cadbury’s shareholders should laugh it off.