Cadbury Stamps its Feet at Buffett's Remarks

It bears repeating that Cadbury's response to Kraft's merger offers is like that of a woman who feels insufficiently worshipped. On Tuesday Warren Buffett publicly stated his opposition to Kraft issuing new shares to pay for a Cadbury bid, fearing that Kraft would overpay. In response, Cadbury Chairman Roger Carr said that Kraft's comments about fiscal discipline is really "about management weakness" and that the offer was limited by "powerful Kraft shareholders restricting the stock content."

Rarely before has a business manager so clearly stated his opposition to the careful stewardship of capital. Over and over again in many companies over the past hundreds of years, managers have believed that they should be paid proportionally to the number of people employed or by the top line, while shareholders are correctly and properly concerned about per-share performance. This conflict is always present, but generally management keeps their share-dilutive aspirations to a dull roar, hoping to make acquisitions that accomplish both goals or which sneak under the radar. Granted, Carr is in the to-be-acquired company, but by so deliberately insisting that Kraft overpay, he has shown a spotlight on the degree to which Kraft shareholders are being asked to hurt themselves in voting for the acquisition.

Indeed, Carr's position directly disparages Kraft shareholders, either in the way that he insists that they be forced to throw money away, or that they must be stupid enough to throw the money away of their own free will, all because of an infatuation with Cadbury.

Quite clearly, Cadbury is not worth the emotion that is being requested of American shareholders. The bid price is already rather full, as has been stated by a number of competent capital managers, and Cadbury's management behavior has been rather emotional, as was stated here earlier.

Kraft shares are undervalued at recent prices. KFT has already been moving up, as I predicted in previous postings. The profitable course of action for capital managers is to be long KFT and short CBY. If the Kraft bid fails, KFT shares will continue to move up and the company will have avoided a dilutive action. If the Kraft bid succeeds, KFT likely will not fall much, as management would need to contradict Warren Buffett in order to raise their bid further.

If Cadbury had wanted American shareholders and management to have fallen in love with it, maybe it should have made itself more accessible over the past 100 years. Figuratively, it has presented itself to American investors while wearing slouchy jeans, sneakers with holes, and a sweatshirt. If you go into any U.S. supermarket, convenience store, buying club, or gas station, do you see Cadbury products? No. Does Cadbury show up at Halloween, Thanksgiving, or Christmas? No. So there is no basis for any emotion, even IF you were to accept the questionable premise that an investment decision should be made on emotion.

There is more: Today Reuters and the The Financial Times ran articles with headlines of substantially opposite meaning, although the articles both made vague reports about Cadbury approaching Hershey, or vice versa, or indicating that a Hershey bid would be more welcome. The difficulty with the scenario is that Cadbury is twice Hershey's size, so Hershey is in no position to be a white knight. In fact, meeting the bid price for CBY would be even worse for HSY shareholders, who would likely even greater dilution than KFT shareholders would.

Then there is the emotional problem: Cadbury's management doesn't really want to consummate a merger. They would prefer that Hershey compete in the bidding process, but they wouldn't want Hershey to win the auction. Suppose that Hershey's managers aren't blinded by their love for Cadbury. In this case it is likely they can see the awkwardness of agreeing to a shotgun marriage where neither bride nor groom are in love, and no one is pregnant. It's likely that Hershey isn't emotionally committed, otherwise they would have made a bid earlier. Therefore, Hershey will probably stay out of the bidding. After all, their worst case would be accidentally winning the auction.

Ref:
FT, "Cadbury denies pursuing Hershey"
Reuters, "Cadbury talks to Hershey for rival bid - sources"