For those share owners taking a long-term view, such policies did indeed join up. But others took a different view.
In 2007, the American billionaire Nelson Peltz bought 3 percent of Cadbury Schweppes. “Nelson Peltz is a force of nature,” declared Shawn Tully in
Fortune
on March 19, 2007. Even at sixty-four, he was described as “relentlessly competitive.” As an activist investor, Peltz had identified a way to unlock value in the business and bring immediate returns to shareholders: a separation of Cadbury from Schweppes.
Separating the drinks and confectionery businesses had been under discussion by the Cadbury Schweppes board as a possible move to release value to shareholders. The combined company was worth around £12 billion ($22.8 billion). Separately the drinks arm was estimated at £7 to £8 billion ($13 to $15 billion) and the confectionery business at £9 billion ($17.1 billion). But there was a catch—a vital one for those who wanted an independent Cadbury Schweppes. The sheer size of the drinks and confectionery giant protected it from
takeover; a potential buyer would find it hard to raise enough money. It was an awkward combination, too; any buyer would almost certainly choose to break up the company. But if the drinks half were already spun off, Cadbury’s confectionery would be a tasty takeover target. Some on the Cadbury Schweppes board argued that it only made sense to proceed with the drinks sale with another confectionery acquisition lined up. With no deal in place, whenever asked in public by investors about a possible drinks sale, Stitzer and the Cadbury Schweppes chairman, John Sunderland, said it was not going to happen.
Behind the scenes, Stitzer drove yet another initiative to unite Cadbury and Hershey in 2007. This time they got close. There was a measure of agreement between the Hershey Trust and Cadbury, but the management of Hershey Foods persuaded the trust not to go through with it. Meanwhile, Nelson Peltz ramped up the pressure, publicly agitating to split Cadbury Schweppes in two.
John Sunderland, who had been with the company for forty years, recalls Roger Carr, who was then deputy chairman of Cadbury Schweppes. “Man and boy, literally straight from university. The concept of separation was more challenging for John—but the recognition that it had to be done I think was very much where he came to.” Stitzer concedes that there were differing views on the board. “There were board members who would rather have seen the businesses stay together, but that was a very difficult thing to do in the face of significant pressure from a large number of shareholders.” The timing was critical: “We got to a juncture where the pressure to sell the beverage business in the absence of a confectionery transaction was the only course of action we could take,” he says. Roger Carr’s view is that Peltz did not change the thinking; “he changed the timetable for the announcement, that’s all.”
Facing wide-ranging pressure to enhance shareholder value, in the spring of 2007, the board of Cadbury Schweppes reached a unanimous decision to split the company just as the global credit crunch began to take hold. As the financial crisis escalated, the sale of the drinks business, now called Dr. Pepper Snapple Group, collapsed. “We were literally
three weeks short of selling our beverages business,” said Stitzer. Suddenly their private equity buyers could not raise the anticipated £7 to £8 billion ($13 to $15 billion) price tag for Dr. Pepper.
Nelson Peltz was determined to unlock the value in the two companies. If a sale of the drinks division wasn’t possible, he wanted to refashion the transaction as a de-merger of the two companies. Above all he wanted higher margins. On December 18, 2007, he sent an open letter to the Cadbury Schweppes board. Management “had nowhere to hide,” Peltz said, and its credibility with shareholders was “very low.” He demanded that the board appoint several new directors and immediately name a new chairman to replace Sir John Sunderland, who was due to retire.
In February 2008, the board announced that Roger Carr would become the chairman of Cadbury’s confectionery when the de-merger was completed. Carr had joined the board of Cadbury Schweppes in 2001. He was well known in the city as chairman of Centrica, and he had held board positions at several other leading companies.
“Nelson literally lobbied our major shareholders to remove the management of Cadbury,” Carr explains. “He put the case that the Cadbury management were completely inept, why they should be removed, why all of these failures demonstrated their incompetence, and why he or his representatives should be installed to extract value from the company. All of this went on in my first three months of chairmanship.”
Carr went round to see all the shareholders, reminding them that the existing management under Todd Stitzer had bought Adams and transformed the business. “So don’t let’s suddenly decide we want to throw out the chief executive and finance director,” he said, “but let’s agree, chairman to shareholders, that the executive team will be given the headroom and support of shareholders for a period to demonstrate their competence and ability to deliver the required performance levels.”
Stitzer accepts that his job was threatened but says that this was not related to the beverages de-merger. “It was related to the margin generation and the management’s ability to control costs,” he says.
He admits that in 2006 Cadbury had a salmonella scare and an accountancy fraud in a factory in Nigeria. “We didn’t deliver the margin we said that year and that caused a stir among some of the shareholders, saying, you know, this is the gang that couldn’t shoot straight.”
Stitzer’s frustration with the short-term interests of shareholders is palpable. “It is outrageous. We’d grown revenues six years in a row by 6 percent. We grew margins six years in a row for 6 percent. . . . [The business] was doing everything right, consistently right. It was best in class on most measures for several years . . . but because of this narrow slice of time, people were—as short-term shareholders can often be—just focused on give us cash, give us margin. And we were trying to do it the right way.”
In the spring of 2008, the costs of the de-merger soared to an estimated billion pounds—a staggering 10 percent of the value of Cadbury Schweppes. Much of the cost was related to the complexities of a UK-to-U.S. separation and listing and also taxable gain. Some investors began to protest that this was too high a price “for a bit of focusing.” Peltz, who now owned 4.5 percent of Cadbury, continued to agitate for a split. The company pressed ahead with the de-merger—ironically the very month that there was further consolidation elsewhere in the confectionery industry. In May 2008, Mars merged with Wrigley, the chewing gum giant. The $23 billion deal toppled Cadbury from its No. 1 slot. Mars-Wrigley became the world’s largest confectionery giant.
By contrast, was Cadbury—now shorn of its drinks division—a potential sitting duck?
Roger Carr thinks not. “The de-merger was the right thing to do,” he says. “We weren’t a sitting duck. The role of companies is not to remain independent at all costs but to create value for those who own them. . . . Certainly by being smaller you become more vulnerable to takeover, but there is nothing wrong with that—that is one way that value is created.” He explains that the benefits of being a pure-play confectionery business became very visible in the company results, and “the board has a fiduciary duty to deliver value for shareholders, which should never be forgotten.”
This begs the question: shareholder value over what period? If the board prioritizes the creation of short-term value for shareholders, where does that leave the wider interests of the company: the workforce, investment for the future, and the creation of long-term value? And if short-term value comes at the cost of breaking up a company, there may be long-term consequences that include sacrificing a company’s independence.
It wasn’t long before Cadbury had an unwelcome approach.
“I was at the airport coming back from Lisbon,” recalls Carr, speaking of one afternoon in late August 2009. “There was a voice mail on my mobile saying, ‘I’m Irene Rosenfeld. I’m in the UK next week and wouldn’t mind coming and having a cup of coffee.’”
Irene Rosenfeld was chairman of Kraft Foods, America’s largest food giant.
CHAPTER
20
They’d Sell for 20p
CHICAGO, ILLINOIS, AUGUST 2009
Irene Rosenfeld had been watching Cadbury, waiting for the right moment. According to the
Times
on September 9, she had once dreamed of becoming the president of the United States and was acclaimed as one of corporate America’s most powerful women. “I began studying psychology at Cornell University,” she said, “and I found researching consumer behavior fascinating.” After earning her BA and an MBA, she spent a large part of her career working her way up the corporate ladder, becoming chief executive of Kraft in 2006 and chairman a year later. Known to colleagues as “charming” but “steely hard,” for her a takeover of Cadbury would be the jewel in the crown of a brilliant career.
Cadbury had a large slice of the British market but potentially even more valuable to Rosenfeld was its position in global markets—especially in fast-growing developing countries. Cadbury was the foremost chocolate brand on two continents, Australia and Africa, the subcontinent of India, and in numerous other countries such as Malaysia, Singapore, and New Zealand and it was developing a presence in Russia and China. Now separated from the Schweppes division, Cadbury’s confectionery business was valued at over £10 billion ($16 billion), with annual sales of £5 billion ($8 billion). For the American food giant, which was five times larger, Cadbury was a tempting target.
Rosenfeld had become chairman of Kraft at a critical point in the firm’s history. Much of the transformation of Kraft into the second largest food giant in the world had happened between 1988 and 2007 under the nurturing wing of America’s leading tobacco giant, Phillip Morris. Kraft gained full independence from the tobacco firm in 2007 and emerged fully formed as America’s largest food and drink manufacturer and a fitting challenger to Nestlé. Kraft operates 168 factories worldwide, has 98,000 employees, and generates annual sales of over £26 billion ($40 billion). Nestlé, the number one food company in the world, has 500 factories and 250,000 employees with annual sales of over £72 billion ($104 billion).
The story of Kraft Foods Inc. began in 1903, when a twenty-nine-year-old Canadian entrepreneur, James Lewis Kraft (known as J.L. Kraft), opened a wholesale cheese business in Chicago. Originally from Stevensville on the shores of Lake Erie in Ontario, he struggled in America to make ends meet and was down to his last $65, which he invested in a horse called Paddy and a rented wagon. His idea was to buy cheese in bulk from wholesalers in South Water Street in Chicago and resell it to individual grocery stores across town, but his plan did not go smoothly. “Paddy and I were equally discouraged,” he told the
St. Petersburg Times
years later. “My small capital exhausted, my hopes for tomorrow nonexistent . . . I was a failure.”
But he persevered and gradually won the confidence of the local grocers. After a year he could invest in more horses and carts. As the business prospered, his brothers joined him, and by 1913 they were selling thirty different types of cheese. They were inventive with their advertising: Kraft cheese was promoted on the Chicago elevated railway, on billboards, and in magazines. The turning point came with the onset of the First World War. J.L. Kraft was particularly interested in how to extend the shelf life of cheese by processing it. He found that when cheese was heated with emulsifiers, whey, and other dairy products, it did not need refrigeration and could travel long distances—exactly what the U.S. Army needed. Kraft provided 6 million pounds of tinned and processed cheese to the military and did not look back.
By 1930, J.L. Kraft had captured 40 percent of the American cheese market and was operating on three continents. He bought other companies, notably the Phenix Cheese Company, makers of Philadelphia Cream Cheese. He expanded his own line of convenience foods, including Velveeta cheese spread in 1928, Miracle Whip salad dressing in 1933, and a boxed Macaroni and Cheese Dinner in 1937—sales of which took off in the Second World War when dairy products were rationed. Kraft had another success on his hands when he introduced the first ready-sliced processed cheese in 1950; it was an instant hit combined with that all-American icon, the hamburger. “It was truly revolutionary,” says Kraft archivist Becky Tousey. “They had to have in-store demonstrations before customers could believe the slices would easily separate.” Later Kraft hit on the idea of wrapping each slice of cheese in cellophane for convenience. By the time J.L. died in 1953, his company had become a household name in America.
The dramatic transformation of Kraft from a successful American firm to the world’s second largest food company started in 1988 when it was bought by tobacco giant Phillip Morris. Phillip Morris—now known as the Altria Group—makes some of the world’s best-selling cigarettes from Marlboro to Virginia Slims and Chesterfield. The tobacco giant had very good reasons to diversify its business. In 1954, in one of the earliest cases of tobacco litigation, a Missouri smoker who had lost his larynx to cancer, filed suit against Phillip Morris. The tobacco company won the case in 1962, but the problem did not go away. As evidence mounted suggesting a link between cigarette smoking and cancer, so did the costs of litigation. In 1988, after a long-running court case, the judge said he found evidence of a conspiracy by three tobacco companies—including Phillip Morris—that was “vast in its scope, devious in its purpose, and devastating in its results.”
That very year, Phillip Morris diversified further into food, buying Kraft for $12.9 billion in one of the largest non-oil corporate takeovers in U.S. history. Phillip Morris had already bought General Foods for $5.6 billion, owners of America’s oldest chocolate confectionery, Walter Baker, as well as other famous brands like Birds Eye. Irene Rosenfeld had begun her own career at General Foods, progressing
through various managerial roles. “I was one of the first two female general managers at General Foods,” she recalls.