economics

January 19, 2010

After Britain’s biggest takeovers… what happened next?

Filed under: Uncategorized — ktetaichinh @ 11:26 pm
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Brands, products and jobs may vanish; famous names may dwindle. But one thing is certain – things are never quite the same again

Products

Cadbury lovers beware: foreign take­overs have long heralded the end of the line for old products and ushered in new ones. After Nestlé‘s takeover of Rowntree Mackintosh, the KitKat bar went from being wrapped in foil and paper to covered in plastic, prompting internet campaigns for the foil to be restored. The Swiss food and drinks company also unsettled traditionalists with a hexa­gonal Smarties pack and changes to Quality Street selections.

Under its new Indian owners Tata, Jaguar Land Rover announced last year it was ceasing production of its X-Type saloon, or “baby Jaguar”. But it is working on a “green” Range Rover, the long-awaited LRX, and will start selling a new Jaguar XJ later this year.

The names Abbey and Bradford & ­Bingley are disappearing from the high street and the chains will now trade as Santander following their takeover by the Spanish banking group.

And it’s not just products that die: slogans have gone too. When mobile phone company Orange launched in the mid-1990s, it introduced such innovations as itemised billing and per-second – rather than per-minute – charges, all under its eyecatching brand campaign “The future’s bright, the future’s Orange”. But when France Télécom snapped up the network at the turn of the century it quickly led to an exodus of management talent and an advertising squeeze that saw Orange’s brand fall off the consumer radar for many years. It now hopes to recapture some of its former glory by merging with smaller rival T-Mobile.

In the drinks world, Dutch ownership has seen Newcastle Brown Ale leave its homeland after 82 years. Heineken-owned Scottish & Newcastle announced in October that the ale will no longer be brewed on Tyneside and that production would move to Tadcaster, North Yorkshire, prompting claims that it will no longer be “Newcastle” Brown Ale.

Job losses

After Jaguar and Land Rover were bought by Tata from Ford for $2.3bn in March 2008, savage cost-cutting ­followed and 2,000 jobs went. As the recession hit car sales hard, the Indian conglomerate announced plans to close one of the business’s West Midlands factories by the middle of the decade, outsource production overseas and close the final salary pension scheme to new members.

The airports operator BAA, bought by the Spanish infrastructure group Ferrovial in 2006, quickly saw its final-salary scheme closed to new members and faced widespread job losses.

In 2006, Nestlé brought to an end 70 years of UK Smarties production, moving it overseas and cutting 645 jobs in the process.

Just last month, Tata-owned steelmaker Corus announced it was mothballing operations at a Teesside factory with the loss of 1,700 jobs, having already cut thousands of jobs since the 2007 takeover.

Tax

Whenever a British public company is acquired by an overseas business, it disappears, by default, from the taxation radar screen. Without the rigours of regular reporting, the tax affairs of the acquired company are subsumed by the web of complex corporate structures commonplace in the modern transnational enterprise. Tax efficiency is a cornerstone of any international organisation; but the ultimate destination of post-acquisition tax revenues becomes less a function of ownership and more a reflection of the relative determination of taxation authorities to attack artificial planning schemes.

Cadbury itself is no stranger to tax efficiency and fought and won an important legal battle in the European courts in 2006 over the tax treatment of overseas subsidiaries. Kraft UK’s most recent accounts set out details of a significant restructuring of its European operations. But the tax accounts of all international companies are littered with details of such activities.

Any change to Cadbury’s tax profile may not be immediately visible. Walkers Snack Foods, the crisp maker, was under the ownership of the mighty Pepsico for 10 years before it implemented a big structural change. As for Tata, the Indian owner of Jaguar, Land Rover and Corus indicates in the individual accounts for those three companies that they are awash with losses, making the payment of UK tax a distant prospect.

Headquarters

If a foreign takeover results in a change of headquarters, banks, lawyers, consultants and other organisations may lose work they used to get from the acquired company. Once mighty ICI, for example, formerly headquartered in London, was acquired by Akzo­Nobel in 2007 and, having been fully integrated, now has its head office in Amsterdam.

But steel maker Corus, which includes the former British Steel, still has its London Millbank headquarters despite being part of India’s Tata. And St Helens-based glassmaker Pilkington, taken over in 2006 by Japan’s Nippon Sheet Glass, kept its name and UK office.

Cadbury-Kraft: A Win-Win Deal?

January 19, 2010, 2:45 am

<!– — Updated: 11:05 am –> It would have been astonishing if Kraft Foods’ hostile bid for Cadbury had gone to the bitter end, Reuters Breakingviews says. Like most contested takeover battles, this one looks to be edging toward a last-minute rapprochement. Cadbury will most likely squeeze more out of Kraft without an auction — an impressive feat, the publication remarked before the two companies’ announcement Tuesday.

Kraft is expected to pay about 840 pence ($13.70) in cash and stock, and let Cadbury shareholders keep a final dividend worth 12 pence a share. That takes Kraft’s offer to about 850 pence ($13.86). Kraft is also expected to raise the cash component to around 500 pence, more than half the consideration.

That would be a 50 percent premium to Cadbury’s pre-bid share price, but it’s not hard for Kraft to justify, Reuters Breakingviews argues. The market rise during the course of the battle accounts for 12 percent. Upgrades to sleepy analysts’ estimates provide perhaps another 10 percent, implying a reasonable 28 percent premium for control.

Alternatively, put Cadbury’s forward earnings on a multiple of 15.5 times — a justifiable premium to the market given Cadbury’s double-digit compound earnings growth ahead — and it’s worth 682 pence on its own, Reuters Breakingviews calculates. With Cadbury’s help, Kraft should be able to lift the cost savings to 7.5 percent of Cadbury’s annual £6 billion in sales. That would imply synergies with a present value of more than £3 billion. On this math, Kraft might have justified a bid close to 900 pence a share.

The re-jiggering of the cash and shares mix means Kraft can lower the amount of stock it puts into the offer, pleasing a big shareholder, Warren E. Buffett. As for Cadbury, it has delivered value for shareholders in an increasingly vulnerable situation, Reuters Breakingviews says.

With hedge funds holding 20 percent and many American investors happy to take Kraft paper, Cadbury’s independence was threatened. Cadbury flirted with a bid from Hershey, which surely helped scare Irene Rosenfeld, Kraft’s chief executive, into raising her offer, Reuters Breakingviews suggests. Peter Mandelson, the British politician who appealed to shareholders not to sell on the cheap, also lent a hand, it says.

It looks as if Ms. Rosenfeld will get her deal. At some points during the battle it looked as if the Cadbury endeavor might sink her career. Now, Reuters Breakingviews says, as long as she can hold to her promises, she will look like the conquering hero of Candy Land.

Reaction: Cadbury falls to leveraged bid

Kraft’s £12bn hostile takeover of Cadbury is the most controversial deal for years. We unpicked the reaction as it came in and looked for clues from Kraft about what will happen next to this 186-year-old British industrial icon

People in Bourneville react to the news that local jobs could be at risk Link to this audio5.44pm: The sense of betrayal that people feel about Cadbury is hard to convey in print, but Steve Morris has just recorded this great package of interviews from Bournville. Worth a quick listen.

4.21pm: Some interesting factoids from Thomson Reuters for the statistically-minded.
* The Kraft/Cadbury deal is the 8th largest foreign acquisition of a UK company ever, it was also the largest announced last year
* It will be the 3rd largest completed hostile acquisition of a UK company ever, after Grupo Ferrovial’s $30 bln acquisition of BAA and KKRs $21.4bln bid for Alliance Boots
* The Kraft/Cadbury deal is the largest European Food & Beverage deal ever and the 7th largest global food & beverage deal of all time

Thomson Reuters also claims that in the last decade the UK has been the 2nd most open market to foreign investment after the US (only in 2004 & 2005 did it surpass the US) although I am not sure how this is calculated, so I merely pass it on. After three years of working in the US, my experience is that there may be lots of small and middle-size foreign takeovers, but almost no household names of the type we have seen in abundance here. When they do happen (especially bids from China or the Middle East), the US tends to be more far protectionist than we are here.

3.32pm: In case anyone is still in doubt that Cadbury really is toast, there is a interesting wrinkle to emerge from closer study of the takeover document. Neil Hume at the FT has spotted that the deal no longer requires the agreement of Kraft shareholders (who had been very jumpy) because the increased cash component reduces the number of new shares to be issued. Share price movements confirm this is a done deal.

1.59pm: Other highlights from the conference call: Kraft has ruled out making any immediate divestments, apart from any assets it is forced to sell to satisfy antitrust regulators. Rosenfeld cites India and Mexico as two markets where Kraft will be much more powerful once the deal is concluded.

Timothy McLevish, Kraft’s chief financial officer, is also on the call and suggests there is little chance of a rival bidder emerging at this late stage:

We feel quite confident that we have put a very fair price on the table. I would be very surprised to see a counter-bidder.

Shares in Hershey, perhaps the only company that could possibly launch a credible counter-punch, have risen 2.6% in pre-market trading – suggesting that a bid is most unlikely.

London-based Warren Ackerman of Evolution Securities then tried to probe Kraft about the future for Cadbury’s UK workforce. Rosenfeld reiterates her commitment that she is not planning to swing the axe, and claims Kraft could even create more jobs in Britain.

I believe the enhanced scale of the combined company will let us continue to invest in Bournville, as well as keeping operations running in Keynsham.

We will be a net importer of jobs into the UK.

That’s the end of the call, with the American operator telling everyone to “have a wonderful day”.

1.48pm: In stark contrast with the gloom of Bournville, it’s all smiles in Northfield, Illinois, where Kraft’s top brass are now holding a conference call with financial analysts.

When not mopping up congratulations from Wall Street’s finest, Irene Rosenfeld declared that the Cadbury deal was a “transformational combination”. She said that investors in both companies would soon be holding shares in a company with “growth prospects in the top tier of global food companies”.

Cynics might suggest that this will come as more of a change for Kraft’s shareholders than Cadbury’s….

On the issue of cost synergies, Rosenfeld said that she discovered more overlap between the two firms after meeting with Cadbury, especially in the “general and administrative” and “corporate” sectors.

12.57pm: My colleague Steven Morris has just been down to the Cadbury factory in Bournville and says the mood is incredibly grim:

It felt a little bit like a death in the family in Bournville today. Just about everyone in this leafy model village on the edge of Birmingham has worked at the famous factory or has a relative who has done so. Even those few who had nothing at all to do with Cadbury had something to say about the famous brand. At Beryl’s Florists, Julie Vaughan, said the whole village was in shock. ‘Cadbury is what Bournville is all about. We’re really worried about what is going to happen.’

You can read Steven’s full piece here.

12.42pm: Lots of angry chat on Twitter, where Cadbury is now the fourth biggest trending term.

Times columnist @Sathnam Sanghera is fuming:

“The West Midlands after 12 years of Labour: Rover sold to Chinese, Cadbury’s to the yanks…”

Former FT colleague @JohnWillman has this interesting rejoinder:

“You should blame the Cadbury family. If they hadn’t sold the family silver to the stock market, it wld still be UK controlled.”

Coincidently (I think) restaurant owner @Henry_Leon asks:

“Does anyone know where i can buy grated choc for proper hot chocolate? all our suppliers went bust”

And @hwallop is less kind than I was about the Telegraph turning its back on the free market accusing @christoperhope of being a “sentimental socialist” for suggesting Mandelson should follow the French example and block Kraft.

12.30pm: Some dark humour emerging online this morning. This interesting remaking of the Creme Egg adverts begs the broader question about what will happen to Cadbury brands now. We’ve got a reporter looking at what the prospects are for consolidation or even (heaven forbid) a change in the ingredients, but in the meantime it’s worth looking at this piece we carried recently by sweets expert (what a job title) Tim Richardson who thinks it could be curtains for Curly Wurly.

Top-sellers such as Dairy Milk, Crunchie and Creme Egg will surely survive. But what about niche brands which don’t see spectacular sales but go on and on for years, and which many of us love with a passion? These are bars such as the chewy Star Bar, the venerable Fry’s Chocolate Cream (which dates back to the mid 19th century) and the crazy Curly Wurly. These may face the chop if Kraft’s number crunchers take a pessimistic (or short-term) view; after all, the chocolate brands Kraft already owns are sure-fire international sellers, familiar at duty-free shops everywhere: Toblerone, Daim and Milka – Curly Wurly is not exactly the jet-setters’ choc of choice.

12.14pm: The Unite union has also expressed its concern about “a sad day for UK manufacturing”.

Picking up the point I made earlier about debt, national officer Jennie Formby says:

We have very real fears about how Kraft will repay its debt, particularly as it has ratcheted it up still further in order to purchase Cadbury. Whatever good intentions Kraft may have towards Cadbury’s workforce, the sad truth is there will be an irresistible imperative to pay down their debt, and this raises real fears for jobs and investment in this country.

Unite is now seeking meetings with both sides in the takeover battle to try to secure guarantees about future UK operations.

12.04pm: Irene Rosenfeld, Kraft’s chairman and chief executive, has been speaking about some of the backroom negotiations that led to today’s deal. Apparently she was able to spy some “additional synergies for a deal” after speaking with Cadbury’s chairman Roger Carr. She also declared that she has got Cadbury’s for a “very good price”, adding that Kraft “would pay what we thought this outfit was worth”.

My colleague Graeme Wearden points out that talk of “additional synergies” is unlikely to reassure those who fear heavy job losses at Cadbury’s UK workforce of 6,000 people – such as the four Labour MPs who just went public with their concerns. Lynne Jones, Richard Burden, Steve McCabe and Gisela Stuart – who all represent Birmingham constituencies – said Kraft’s takeover could “pose real dangers for jobs, innovation and the skill base in the West Midlands”:

We worry about the kind of future that Cadbury’s would have as part of this giant multinational whose corporate riorities are decided a long way away from the West Midlands and from those other areas of which Cadbury’s has long been a part.

The MPs also pointed to the broader issue – the relative ease at which foreign firms can launch hostile bids for UK companies, and succeed.

11.59am: The most interesting counterfactual theory swirling around this morning is what would have happened if Bournville was in France? The parallels are striking (even the name sounds French) as the French defended food group Danone from a very similar American raid only a few years ago. Last night I listed 50 UK companies swallowed up by overseas predators (many of them French) but could only think of a handful that went the other way. Chris Hope at the Telegraph has an interesting take on this this morning that echoes my argument about the failures of British industrial policy:

In theory, Danone would be an ideal morsel for the likes of Nestle, Kraft, or Pepsico to gobble up. That is nearly what happened in 2005 when Danone’s shares bounced 20 per cent on speculation that PepsiCo might buy it. Then the French Government stepped in to draft a new “Danone law” to protect companies in “strategic industries” from takeover. It looked protectionist then. But not today, given the relative health of French industry. Perhaps Lord Mandelson should consider a “Cadbury law”, to protect our national champions?

11.46am: My colleague Jill Treanor points out that there is a break clause of £117m in the details of the agreement between Cadbury and Kraft. This is the amount of money that Cadbury would have to pay Kraft in compensation if the deal doesn’t go through for any reason. These are quite standard and are designed to deter rival bidders from breaking up the party. In this case though it is only likely to fuel anger toward Cadbury management as it makes it doubly hard for a white knight bidder like Hershey to come in. Cadbury would argue it allowed them to squeeze an extra 10p or 20p a share out of Kraft and they wouldn’t have agreed to it if there was any realistic chance of Hershey coming in.

11.06am: One Cadbury worker has spoken about the impact that the protracted takeover battle has had on employees. He told the Press Association that there are “a lot of worried people” inside the Bournville factory:

Nobody really knows what is going on or what this might mean in terms of job losses, but inside that factory there are a lot of people who are very, very worried about the future – the future of the company and their own future, their jobs and their families.

“It is not a good atmosphere here today.”

10.47am: Cadbury insiders tell me the real turning point was when their largest shareholder Franklin Templeton withdrew its support and privately told them it would back a Kraft bid at 830p or above. But how realistic was it to expect this US mutual fund to hold out for long in the first
place? A bit of digging on the Franklin website reveals this telling remark from one of their fund managers under the heading “merger opportunities”:

Investment bankers are relating that their calendars are very full these days, so we believe the merger arbitrage space could continue to be quite fruitful for us over the next six to nine months. A good example of this acquisition trend is Kraft Foods recent bid for UK-based confectionary maker Cadbury, which has been an undervalued equity holding of Mutual Series for some time. In fact, Mutual Series has been one of Cadbury’s biggest investors. The Mutual Series team identified the confectioner some time ago when it was trading at a deep discount to the team’s estimate of its intrinsic value, long before Kraft Foods’ unsolicited takeover approach. Kraft took its hostile bid to Cadbury’s shareholders in early November, and we are presently awaiting a resolution.

10.31am: More City reaction is coming in, and Jeremy Batstone-Carr of Charles Stanley has given today’s offer a rather lukewarm reaction. He calls the offer price “somewhat on the low side of other deals struck in the global Food Producers sector”, based on a comparison with Cadbury’s earnings.

Batstone-Carr also questions Cadbury’s claim that it had achieved a good price for shareholders:

Although we always considered that 850p could be enough to win shareholder support we have to admit surprise at how meekly Cadbury has apparently acquiesced. The UK-based confectioner has made much, over the duration of the offer period, of the justification for remaining a stand alone business. Trading has improved markedly over the past six months and only last week Chairman Mr Roger Carr had confidently predicted that the company’s share price could be over £10.00 in due course as the fruits of that trading improvement, coupled with the “Vision into Action” programme, were harvested.

And perhaps worryingly for Cadbury workers, Batstone-Carr reckons that Kraft will beat its own target for cost savings and synergies of $675m per year.

10.23am: The Takeover Panel has also just given US chocolate giant Hershey and Italy’s Ferrero a deadline of 7am next Monday to say whether they will launch their own rival offer for Cadbury. Back in November the two firms both announced they might entering the fray, and at one stage were considering a joint bid. However, the chances of either making a late attempt to trump Kraft now appears remote.

10.01am: With Cadbury’s shares hovering around 837p this morning, the City appears to be discounting the possibility of a late rival bid.
We are also hearing that Cadbury’s major shareholders will accept Kraft’s terms.

Standard Life (who yesterday indicated that Kraft would need to pay 900p per share) is now backing the offer. David Cumming, its head of UK equities, just said that “We are supportive of the management’s decision, although the achieved price is slightly light of our stated target.”

9.39am: There’s little in the Kraft offer details to reassure Cadbury employees. All it says is:

Kraft Foods has given assurances to Cadbury that, on the Final Offer becoming or being declared wholly unconditional, the existing contractual employment rights, including pension rights, of all employees will be fully safeguarded.

That’s pretty much meaningless given that existing employment law demands most of that. Crucially, there appears to be no promise on jobs.

9.34am: That was quick. Gordon Brown has come out and commented on the bid. Reuters report the prime minister warning he is “determined that levels of UK investment in Cadbury are maintained and jobs secured”. Hard to see how he can guarantee that when the deal is all but done already. He’s at a press conference with the new EU president so I guess there’s a limit to how flagrantly he can flout European competition law by criticising the deal.

9.32am: The details of the Kraft bid for Cadbury are out and it’s worse than expected for the British confectionery giant. The majority of the offer (500p, or 510p if you include a special dividend) is in cash, which is one of the reasons it is almost certain to be accepted by Cadbury shareholders following the management recommendation. The catch is that this will saddle Kraft with far more debt than was expected when the process started. In effect Cadbury has fallen to a leveraged takeover of the type that we thought we might have seen the last of. The reason for this is almost certainly the intervention of Kraft investor Warren Buffett, who was determined not to see too many extra shares issued in a way that would dilute his stake. I’ll try to find some analysis of what this all does to Kraft’s balance sheet now, but it will be interesting to see what it does to its share price when the US market opens.

9.32am: The details of the Kraft bid for Cadbury are out and it’s worse than expected for the British confectionery giant. The majority of the offer (500p, or 510p if you include a special dividend) is in cash, which is one of the reasons it is almost certain to be accepted by Cadbury shareholders following the management recommendation. The catch is that this will saddle Kraft with far more debt than was expected when the process started. In effect Cadbury has fallen to a leveraged takeover of the type that we thought we might have seen the last of. The reason for this is almost certainly the intervention of Kraft investor Warren Buffett, who was determined not to see too many extra shares issued in a way that would dilute his stake. I’ll try to find some analysis of what this all does to Kraft’s balance sheet now, but it will be interesting to see what it does to its share price when the US market opens.

Why Kraft just couldn’t wait to consume Cadbury

Warren Buffett’s critique is right – but if Kraft had delayed, Cadbury investors might have seen the true value of their share

Is it too late to call the whole thing off? Even Warren Buffett, the biggest shareholder in Kraft, thinks the takeover of Cadbury is a “bad” deal. His comments are worth listening to in full. They are an excellent analysis of how hard Kraft has had to strain in order to do this deal.

Buffett’s “new” argument is that, far from getting the advertised $3.7bn (£2.3bn) from the sale of its pizza business to Nestlé, Kraft will receive only $2.5bn – the taxman will consume the rest. And, given that this pizza business makes annual profits of $280m, Kraft is really selling at nine times earnings. That’s a strange way to help fund the purchase of Cadbury at 13 times annual top-line earnings. Or, rather, 16 to 17 times earnings, reckons Buffett, once depreciation, restructuring costs and $390m of bid expenses are included. “It’s hard to get rich that way,” he concludes. Correct.

From the point of view of Cadbury’s board, attempting to fend off the charge that it rolled over too cheaply, Buffett’s comments are clearly helpful – they suggest Kraft was pushed on price to uncomfortable levels.

So should we applaud the Cadbury board for pulling off a financial coup?

No. Consider Buffett’s biggest beef about Kraft issuing “undervalued” shares to part-pay for Cadbury. Even Kraft’s directors agree with that description, he grumbles. This raises, once again, the biggest unanswered question in the saga: why on earth did chief executive Irene Rosenfeld choose to pursue Cadbury at this time?

Common sense says it would have been better for her to wait until she had put Kraft’s own house in order, seen the share price rise and thereby have a stronger currency in which to bid. Rosenfeld never provided a satisfactory answer to the timing question. “Why wait?” was the gist of her argument.

The suspicion must be that Kraft was scared that investors would soon wake up to the fact that Cadbury’s rapidly improving trading was the real thing this time, rather than the stop-start progress seen a few years ago. It was now or never for Kraft.

Put another way, Cadbury’s real failure was in its inability to persuade investors of its progress in the 18 months before Kraft turned up. The group started with a share price 100p too low, which is a terrible disadvantage when the shareholders are interested primarily in takeover premiums rather than the slippery, but crucial, concept of fundamental value.

By the way, where is Todd Stitzer? The chief executive of Cadbury hasn’t uttered a word in public since the board rolled over. Instead, we have been treated exclusively to the Roger Carr show. The mischievous thought occurs that perhaps Stitzer, a Cadbury man for 25 years, didn’t really want to recommend 850p-a-share.

Not at all, insist company insiders, Stitzer is a rational fellow who could understand that most shareholders clearly wanted to sell at 830p-plus and that trading a recommendation for an extra 20p on the price was logical. Stitzer was apparently not the last person over the line.

There are no grounds at all to doubt this account, but it would be nice if Stitzer, the public face of the company, stood up himself. His body language would be fascinating.

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