Chocolate Wars: The 150-Year Rivalry Between the World's Greatest Chocolate Makers (48 page)

The mergers and acquisitions continued on a grand scale. In 1989 General Foods merged with Kraft and soon acquired Jacob Suchard, which brought with it Suchard chocolates and the Tobler company, makers of Toblerone
.
In 1993 Kraft General Foods bought the historic British chocolate confectioner, Terry of York, acquiring Terry’s Chocolate Orange and other much-loved treats and expanded further into Europe with the purchase of the Scandinavian confectioner Freia Marabou. In 2000 Phillip Morris bought Nabisco Holdings, America’s number one cookie maker, for a staggering $18.9 billion and merged the company with its Kraft division. Phillips Morris, apart from being one of the largest cigarette companies in the world, was rapidly becoming a colossal food concern.

Then in 2000, Phillip Morris and R.J. Reynolds were ordered to pay $20 million to a smoker who was dying of lung cancer. It was the first ruling to hold cigarette makers responsible for the health of people who took up smoking in spite of the package’s compulsory warning labels. On June 7, 2001, Phillip Morris was ordered to pay $3 billion to a smoker with terminal cancer—a record-breaking individual damage award against a cigarette maker. One week later Phillip Morris raised $8.7 billion by selling 16 percent of its giant food division: Kraft Foods.

Kraft Foods was now listed on the New York Stock Exchange but it was still principally owned by Phillip Morris. In 2003 Phillip Morris changed its name to Altria, which still owned the majority of Kraft’s stock. Although the judgments against the tobacco giant were reduced on appeal—the $3 billion damage award was lowered to $82 million in March 2006—more lawsuits continued to be filed against the company.

The following January, the Altria Group voted to spin off all remaining shares of Kraft Foods. A news release posted on January 31, 2007, claimed the spin-off would “enable both Altria and Kraft to focus more effectively on their respective businesses,” and would “enhance Kraft’s ability to make acquisitions.” Kraft Foods finally became independent of tobacco on March 30, 2007. Its holdings included:
Maxwell House coffee, Philadelphia Cream Cheese, Oscar Meyer hot dogs, Nabisco cookies, crackers, and snacks, Dairylea, Terry’s chocolates, and Kraft cheeses. With its complex history, Kraft, declared London’s
Evening Standard
on September 9, 2009, “is a creature of Wall Street, an assemblage of businesses including General Foods and Nabisco, that were stitched together by Phillip Morris, the tobacco company during the merger mayhem of the 1980s and 1990s.”

Irene Rosenfeld was appointed chairman of Kraft Foods in March 2007. She knew that despite the company’s phenomenal size and range, many of its brands were established in developed markets, yielding low growth of around 4 percent to shareholders. With Cadbury’s stronger footprint in faster-growing developing markets, Rosenfeld saw the potential to raise this figure to 5 percent growth.

On August 26, 2009, she flew to Luton in the Kraft company jet and made her way to the Ritz Hotel in London. The following morning, she went to see the Cadbury chairman, Roger Carr. The meeting was discreetly scheduled for his office in Centrica’s headquarters in Burlington Lane (Carr is also chairman of Centrica). Carr has a reputation as a “city grandee,” according to Andrew Davidson of the
Sunday Times.
“A hard man to read,” says Davidson, “and as cautious and leathery as an old tortoise.”

The 9:30 meeting did not take long.

Carr remembers that after about three minutes of pleasantries, “She said, ‘You know, I have this great idea that we should buy you.’”

Rosenfeld told him her plans were to offer a cash and shares bid for Cadbury worth £10.2 billion ($16.3 billion).

Carr describes Rosenfeld as “clinical, distant, and quite hostile. She showed no natural warmth. . . . Her body language was driven and intense—certainly not relaxed and engaging.”

Poker-faced, Carr did not hesitate and replied, “Well, first of all, this is something I will want to discuss with the board, and secondly, Cadbury is a very good business, it’s doing very well as an independent, and certainly doesn’t need Kraft.”

After a brisk exchange, Rosenfeld said she would courier round a letter that afternoon and asked for his response by Wednesday.

“We’ll give you a response when we think it is appropriate,” he responded. He walked her to the elevator, “and off she went.”

The meeting, he recalled afterwards, did not last more than fifteen minutes.

Later that day, Rosenfeld’s letter arrived. “I very much enjoyed meeting you this morning,” she began with pro forma courtesy. Her letter set out a textbook case for globalization. Kraft’s purchase of Cadbury would be the logical next step as “we shape the company into a more global, higher growth and higher margin entity.” The new company would have $50 billion in revenues each year, “a geographically diversified business,” and “scale in key developing markets such as India, Mexico, Brazil, China, and Russia.” The “strong presence in instant consumption channels in both developed and developing markets” would expand the reach of the business and provide “potential for meaningful revenue synergies over time.” There was also the possibility of savings. In a subsequent letter, Rosenfeld explained how the acquisition would save $300 million in economies of scale in manufacturing, $200 million in administration, and $125 million in marketing and media.

At Cadbury’s headquarters, Roger Carr and Todd Stitzer swung into action. An emergency meeting was held at Goldman Sachs offices on Fleet Street. “The mood was we will not allow these people to steal this company,” recalls Carr. “Everyone had utter resolve around the board table to resist this.” Carr drafted a letter rejecting the offer. The plan to bring Cadbury into Kraft’s “low-growth conglomerate business,” he said disparagingly, was “an unappealing and unattractive prospect.” The offer did not reflect Cadbury’s value or its growth prospects compared to Kraft’s “less focused business mix and historically lower growth.”

Rosenfeld’s next move was to publish the letter she had sent to Carr, initiating what is known in the trade as a “bear hug.” When letters of intent are made public, says Carr, “the predator can distress and disturb the prey whilst alerting the market to the potential for an exciting bout and quick financial gain.” The audience is in no doubt “that a showdown is inevitable.”

The showdown soon began. Stitzer spoke to the press in a defiant mood: “We are in half the world’s fifty largest confectionery markets and we are No. 1 or 2,” he declared. “We are big in Argentina, Colombia, Brazil, and Venezuela. . . . Combining with Kraft could derail Cadbury’s expansion plans.” The British press was equally hostile, pointing to the fate of Terry, the cherished British chocolatier, under Kraft’s stewardship. Chocolate production had been moved to Eastern Europe and the historic factory in York closed in 2005. Felicity Loudon, George Cadbury’s great-granddaughter, condemned Kraft as a “plastic cheese company” and voiced fears that Kraft could asset-strip “the jewel in the crown.” Rosenfeld’s global powerhouse was little more than “brazen imperial ambition” declared the
Evening Standard
on September 9. Kraft was caught in a static American market that “rises and falls with the waistline of Joe the plumber.” The
Sunday Times
summed up the force of the British opposition: “Cadbury Gives It Both Barrels” read the headline with an image of Todd Stitzer blasting the U.S. predator.

Irene Rosenfeld did not waver. Patience, she told reporters, was her “most challenged virtue.” In what was seen by many as an unnecessarily hostile move, she took her offer straight to Cadbury’s shareholders. The entire future of the company would depend on the interests of the shareholders. The prospect of a takeover prompted a shopping frenzy. Hedge funds and other short-term investors piled on to Cadbury as the share price soared. What, they wanted to know, would maximize their profits?

N
ews of Kraft’s proposed takeover sent Cadbury shares soaring. City sharks and other predators began circling around the chocolate prey looking for a quick kill. The financial press was full of speculation about the possible outcome possibilities as bankers and accountants gutted the balance sheet. There was talk of carving up Cadbury’s assets. Could parts of Cadbury be won for a knockdown price? Investors had their eyes on the most profitable brands, Dairy Milk and Trident gum. If the confectionery industry was about to be
massively realigned, no one wanted to be left on the sidelines. Even smaller firms joined the fray.

Rumors swirled about that Hershey’s management had appointed J.P. Morgan to investigate a possible bid. Finally both the trust and the company were spurred to action. Company executives were worried that Hershey would be left behind in a new world of behemoths like Kraft-Cadbury, Mars-Wrigley, and Nestlé. “They came here to the Stafford Hotel nearby,” recalls Carr. “There were four or five meetings.” Among the many tactical issues on the table: Could the Hershey Trust keep control with a massively reduced shareholding in a combined company? If the companies merged, how would Cadbury shareholders benefit? Hershey was half the size of Cadbury, so how could it afford the acquisition? Did Hershey have the appetite for the risk? If the two companies could resolve these and other issues, Carr was confident the merger would be “a wonderful outcome and exactly what I would have liked to have occurred.”

Cadbury was under siege. Hedge funds, which previously owned 5 percent of Cadbury shares, bought 20 percent in a matter of weeks. “We had a share price of nearer £5 just before Rosenfeld bid,” Carr explains. “Because she was offering around £7 per share, the market was sure any buyout would happen above that, so shares quickly ran to above £8.” The loyalty of long-term investors was severely tested: If they had bought in at £4 to £5 and could see an immediate £3 profit, they were tempted to sell at least some of their holding. This opened the door for hedge funds to continue to pile in. Carr points out that British institutional investors had already turned their backs on Cadbury. At the start of the bidding process, only 28 percent of Cadbury shares was British owned, as opposed to 50 percent owned by Americans. “British investors thought it was a lacklustre business,” Carr explains, “while American investors saw the stock was cheap relative to American alternatives, and they kept on buying.” Now these American investors could cash in as the share price soared.

With the ownership of Cadbury changing fast, further destabilizing the company, on September 21, management asked the UK’s Panel on Takeovers and Mergers to give Kraft a “put up or shut up” deadline, which required Kraft to make a formal offer or walk away.

As shareholders rushed to evaluate their options, the billionaire investor Warren Buffett, a cautious man who owned 9 percent of Kraft, spoke out. The “Sage of Omaha,” as he is known to admiring investors, is one of the richest men in the world, a position earned after a lifetime of walking with care through inflammatory markets. He urged Kraft not to overpay for the British chocolate firm, and it appeared as though the Kraft management was listening.

On November 9, the day of the Takeover Panel deadline, Rosenfeld made a formal bid at the same price as her earlier offer. But because Kraft’s share value had declined slightly, the bid amount was now worth less: £9.8 billion ($15.7 billion) or £7.17 per share. Once again, Roger Carr dismissed the offer as “derisory.” It was beginning to look as if Kraft could not afford Cadbury.

On November 18, news broke that the Italian firm of Ferrero Rocher was joining the chocolate wars. Ferrero, the family company behind Nutella, Ferrero Rocher chocolate pyramids, Tic Tacs, and Kinder Surprise, was even smaller than Hershey with eighteen factories and 22,000 employees. Could it possibly join forces with Hershey to make a combined bid for Cadbury? Confirmation that the Hershey Trust was reviewing a possible bid for Cadbury fuelled excitement that Kraft’s bid would be topped. Then Nestlé revealed it was considering joining the bidding war. Would Nestlé partner with Hershey to make a counterbid against their rival Kraft? Or would Kraft come back with a higher offer? Just two months after Kraft’s opening salvo, amid speculation that Hershey—or someone else—might produce an $18 billion bid, Cadbury’s shares soared by 40 percent.

On December 14, Cadbury’s management issued a bullish defense. Stitzer improved profit targets and promised greater returns to shareholders as an independent with the prospect of 5 percent annual growth and double-digit dividends. These forecasts were backed up by the company’s third-quarter results. Cadbury’s sales were better than expected in contrast to Kraft, which had to cut its 2009 sales forecast.

After a cold and snowy Christmas, Kraft enhanced its bid on January 5, 2010. Although the total value of the deal was the same as before, shareholders would receive a higher proportion in cash. Two
days later, however, Kraft revealed that only 1.5 percent of Cadbury shareholders had accepted Kraft’s bid. Cadbury rejected Kraft yet again, insisting the enhanced bid was just “tinkering” and the offer remained “derisory.”