Here comes Hershey. Well, maybe. Putting a fully funded offer for Cadbury on the table by the end of next week still looks a very tall order. But assume Hershey does turn up. Should Cadbury’s shareholders simply cheer the appearance of a white knight that is deemed to be a better fit, culturally and commercially, than Kraft?
The size of any offer, naturally, will largely dictate the investors’ response. But they should also ask a few questions about the supposed harmony between the two companies. After all, any Hershey bid would inevitably involve asking Cadbury’s shareholders to accept a large slug of shares – as much as half the total value of a bid, suggest analysts.
For a start, the Hershey trust enjoys supercharged voting rights that currently give it 80% of the voting rights at Hershey for 30% of the economic interest. Dual voting structures were long ago deemed culturally abhorrent by UK institutional shareholders and most UK versions were swept away before the turn of the century. Is the Hershey trust willing to accept the principle that equal rights should attach to equal risk? Almost certainly not
No big deal: Italian lessons in whether or not to bid
The Hershey Trust Company is pressing ahead with plans for a Cadbury counter-bid. Let’s hope it first listened to Michele Ferrero, big daddy of the family owned Italian confectioner. In deciding not to pursue the UK group , he has given an object lesson in the risks inherent in ambitious dealmaking.
In theory, the preoccupations of the 85-year-old patriarch of a private Italian confectioner and of the boss of a public company are as far apart as a fresh espresso and a lukewarm cup of Kraft’s Maxwell House.
In practice, all would-be acquisitors should cut out and keep Mr Ferrero’s reasons for not bidding against Kraft:
1. Too disruptive. The chaos sown by a merger is easy to underestimate if you’re an arch-delegator used to ordering other people to implement your vision. But you don’t have to be a Willy Wonka figure with your own personal laboratory to worry about the impact of a mega-bid on your core strengths and loyal staff. Latterly, big UK-based pharmaceutical companies such as GlaxoSmithKline and AstraZeneca have sworn off such deals for similar reasons.
2. Too much debt. If only the humbled leveraged buy-out kings had allowed a little Piedmontese common sense to prevail before pressing ahead with their debt-fuelled domination of the corporate universe in 2006 and 2007.
3. Too little added value. Apart perhaps from helping Ferrero step up distribution of its Kinder eggs in the UK, a Cadbury acquisition, as my colleague Paul Betts pointed out in November, wasn’t necessary to sustain the Italian group’s growth.
4. Too controversial. There is a difference between publicity and controversy. Stop and consider whether the benefits of volunteering to expose your business to even more intense public and investor scrutiny outweigh the threats.
Mr Ferrero differs from Todd Stitzer of Cadbury or Irene Rosenfeld of Kraft in one critical respect. He doesn’t have to answer to shareholders. Yes, he had to convince his family to step away from Cadbury. But many Italian entrepreneurs can simply decide not to put their comfy lifestyle (house in the mountains, house at the beach, Alfa Romeos all round) on the line.
Hershey, which shares some of Ferrero’s conservative characteristics, may reach a different conclusion. But even if you’re a listed company executive, the next time advisers tout a transformational takeover, you should unwrap a Ferrero Mon Chéri, let it melt in the mouth and, before deciding, answer one question: che cosa farebbe Michele? What would Michele do?
Wooing investors into emerging market funds last year should have been akin to handing candy to street urchins. Consumers were under the gun to save more, but received risible deposit rates. Emerging markets, meanwhile, were off to the races , with the MSCI index surging 80 per cent over the year. Small wonder that emerging market equity funds pulled in a record $65bn (£40bn) and bond funds $8bn, according to data tracker EPFR Global.
So where was Ashmore? The UK-based emerging markets specialist received a meagre $300m of net inflows in the three months to end-December. Add on $200m of investment performance, and assets under management improved to $31.1bn, below market forecasts. Fees, contrarily, were sharply ahead of expectations – suggesting investors should steer clear of the funds and buy the company’s shares instead.
Not so fast. First, Ashmore’s performance was less out of kilter on a quarterly basis. Debt forms the lion’s share of the group’s portfolio and emerging market bonds, as measured by the JPM EMBI+ Composite Index, returned 1.4 per cent in the final quarter of last year, compared with 26 per cent for the full year. Equities decelerated to 8.6 per cent. Ashmore netted bountiful fees by surpassing its relatively modest investment hurdles for funds whose year ended, serendipitously, in December.
Indeed, rather than being wayward, Ashmore offers a telling glimpse of future performance on a broader industry basis. Net inflows are stunted by liquidity requirements at pension funds and other institutional investors. They will be further swiped as emerging markets lose momentum – as will fee income.
Emerging markets, frequently hailed as saviours of the universe, are more prosaically a leveraged punt on their developed counterparts. Their economies may sometimes be ahead of the curve – see China’s monetary tightening and India’s inflationary pressures – but the broad correlation remains. Enough to give pause for thought, in short, to investors in both fund managers’ shares and their emerging market funds.
Hershey Said to Speed Up Cadbury Efforts
January 15, 2010, 7:10 am <!– — Updated: 2:28 pm –>
Hershey is stepping up efforts to prepare a bid for Cadbury and plans to make a decision after Kraft Foods‘ final offer for the British chocolate maker, people with knowledge of the matter told Bloomberg News.
Hershey has been in talks with credit ratings companies in recent days about how to structure a bid without imperiling its investment-grade debt rating, said the people, who declined to be identified because the talks are private.
Doubts mount over Hershey tilt at Cadbury
By Greg Farrell, Martin Arnold and Jenny Wiggins
Published: January 13 2010 18:46 | Last updated: January 14 2010 19:17
|Taking up arms? A bid for Cadbury from the US group would have steep hurdles to overcome to have any chance of success|
A committee of three Hershey directors set up to study the feasibility of a Cadbury bid has given the go-ahead to pursue a deal, and Hershey has authorised JPMorgan Chase and Bank of America, its primary banks, to line up financing for its bid.
A key component of the transaction would be the infusion of billions of dollars from family investors being lined up by Byron Trott, the former Goldman Sachs investment banker who now runs his own fund. At Goldman, Mr Trott was instrumental in crafting the deal that helped Mars acquire Wm Wrigley Jr, a deal in which Warren Buffett provided $6.5bn in cash and debt.
Any Hershey bid would come between January 19, the final day Kraft is allowed to modify its existing £10.4bn offer, and January 23, the deadline for any counter-offers.
But questions remain over financing. Hershey is reluctant to borrow heavily because it would lose its investment-grade credit rating. To keep its bank debt below levels of leverage that would undermine that rating, Hershey would need to issue new equity.
Given expectations that Hershey, like Kraft, would have to bid close to 850p a share to succeed, the total enterprise value of the combined companies would be above $31bn (£19bn). With Hershey only having $8bn in equity, it would probably need to issue $10bn in new equity to keep the debt at the appropriate level.
Such a large issue threatens to dilute the ownership of the Hershey Charitable Trust, which under Pennsylvania law must retain control over the Hershey Corporation.
Meanwhile, private equity groups are getting cold feet about joining a potential Hershey bid, partly due to a culture clash with the family trust that controls the US group. Big buy-out groups also worry that Hershey could overpay if it tries to outbid Kraft.
KKR considered joining a potential Kraft bid last year, according to a person familiar with the talks, but worried about price and governance.
Buy-out groups have also been put off by Hershey’s governance structure, which would make it difficult for them to exercise influence and control over strategy and key decisions.
The Hershey Trust owns a third of the group’s stock but controls 80 per cent of shareholder votes. This structure could make it hard to accommodate a private equity group.
One person familiar with Hershey’s strategy said buy-out groups were more likely to act after any takeover of Cadbury was completed.
Analysts and investors were sceptical that Hershey could make a formal offer by January 23. “Time and financing details are not on Hershey’s side, especially on a solo basis,” Scott Frost, an analyst at HSBC Securities in New York, wrote in a note to clients.
A US institutional investor that recently sold its Cadbury position, said: “I’d be shocked if they got something done without Ferrero or Nestlé. I suspect [Hershey’s] is playing a mean game of chicken trying to get Kraft to pay more.”
Hedge funds, which make up more than 20 per cent of Cadbury’s shareholder register, were among investors meeting Irene Rosenfeld, Kraft’s chief executive, in London on Thursday . “The message [to Kraft] was that 850p would get you comfortably over and get the [Cadbury] board on your side,” one hedge fund manager said. Kraft’s current offer is worth 763p a share.
Peter Langerman, chief executive of Franklin Mutual Advisers, Cadbury’s top investor with a 7 per cent stake, said: “We have absolutely no interest in accepting the current Kraft offer.”
Mr Langerman added that Franklin had no problem owning Kraft stock but expected a material increase in the overall bid value before considering it. “At the right price we’re happy to own Kraft stock.”
Some funds said they would sell at 820p. Cadbury’s shares closed in London on Thursday at 799p.