Irene Rosenfeld quickly sold off Kraft’s North American frozen pizza business to Nestlé for $3.7 billion. Warren Buffett was on her back: “To give up a business that makes $280 million a year for $3.7 billion,” he said, “I think that’s a mistake.” But Rosenfeld was steadily moving closer to her goal. The sale gave her extra cash to maneuver in the Cadbury bid and made it less likely that Nestlé would join Hershey or Ferrero in an attempt to outbid Kraft. In addition, according to Adam Leyland in the
Grocer
magazine on January 23, 2010, Buffett’s warnings against Kraft overpaying for Cadbury “helped Kraft shares recover, upping the value of the bid” and served to “low-ball expectations.”
There was one American investor, usually vocal, who “remained uncharacteristically quiet,” continues Leyland. Nelson Peltz, the activist investor who had agitated for the de-merger of Cadbury Schweppes in 2007, had at the same time taken a significant position in Kraft. Moreover, “Peltz secured a two-year deal with Kraft management not to publicly criticise the company in exchange for two independent director appointments on Kraft’s board,” writes Leyland. This “gagging deal” expired during Kraft’s bidding process. Yet Peltz remained quiet. “By this time he had also, intriguingly, sold the majority of his shares in Kraft,” says Leland. “Anyone looking for a silent player behind the scenes driving this deal should look no further than Peltz.”
The week before Kraft’s deadline to make a final offer on January 19, speculation rose that Hershey was about to mount a solo bid. There were anxious meetings in London hotels. “Until the very, very end, Hershey was still trying to find a way to increase the consideration in a manner they could finance appropriately,” says Stitzer. “They couldn’t get to a place where they needed to be.” Carr was more blunt. The Hershey Company, he said later, “was paralysed by internal conflicts of opinion. There were so many schools of thought they were never able to agree on a compelling offer at the same time. It was very disappointing for Cadbury and, I believe, the Hershey Trust.”
With the deadline looming, Irene Rosenfeld flew back and forth across the Atlantic. She was trying to gauge the level at which Cadbury shareholders might be tempted to sell. Short-term investors such as hedge funds now owned as much as 31 percent of Cadbury.
Carr was talking regularly to the shareholders. “Some of the hedge funds said to me, ‘We’ve bought at £7.80—with 20p in five weeks of ownership—we’ll sell for £8.’ The ones that came in later, maybe they bought at £8. They’d sell for the same 20p—but the clearing price became £8.20.” British institutions still held some 28 percent of Cadbury, and some of them wanted above £8.50—but they were in a minority. “A lot of the American owners said they would sell in the £8.20 to £8.30 zone for sure.”
On Saturday, January 16, Rosenfeld reconvened a meeting of the Kraft board. She wanted approval to make a new offer to Cadbury.
In London, Warren Buffett’s warnings not to overpay for Cadbury had been widely reported. Many investors believed that Kraft could not afford to increase its offer significantly. As the deadline approached, Cadbury shares began to fall on the expectation that the bid might fail. There was talk that Rosenfeld might be obliged to make an embarrassing retreat. Cadbury might yet get away.
But as Rosenfeld returned to London and settled into her suite at the Connaught Hotel in Mayfair, she had good reason to feel confident that she held a strong hand. “She telephoned on Sunday night at 7:00 asking for a meeting,” recalls Roger Carr. It was the first time they’d spoken since their meeting in August. She assured him it would be productive to meet. “At that point I then have a duty to meet,” Carr adds.
A meeting was arranged for the next morning in a private room at the Lanesborough Hotel. It was Rosenfeld’s final chance to win Carr’s approval for the bid, which would make the takeover far more straightforward.
Carr remembers vividly how the meeting started: “She began by saying, ‘We’ve listened to you, we’ve listened to your shareholders, we know we have to pay more money, and I’m going to offer you £8.30.’”
The minute she said that, “I knew we’d lost,” he said. “I knew the business was sold in the real world.”
Carr left to speak to the other members of the Cadbury board. Having spoken to both shareholders and advisors, the board believed that if Rosenfeld had gone to market the following day and offered £8.30, she would have secured more than 50 percent of the shareholders immediately. She only needed 50.01 percent.
“I knew she’d got it,” said Carr. “My job from that point on became to get as much value as I could. . . . The most important thing was to get it from £8.30 to £8.50, which was worth nearly another half a billion dollars for shareholders.”
But did Carr and the board capitulate too soon? “By playing the heritage card so strongly in their defense against Kraft,” observed Alex Brummer in the
Daily Mail
on February 2, they raised the hopes of all stakeholders “that this was a genuine defence aimed at keeping independence rather than a bluff aimed at getting the price up.” Those in favor of preserving Cadbury’s independence were left to wonder whether the board could have seen off the bid at £8.30 had they stood firm.
Carr doesn’t accept this. “We resisted the union jack defence and focused on value. I fought for the shareholders. I’m paid by the shareholders and I delivered huge value for the shareholders with the board—that is my responsibility.”
Later in the day on January 18, Carr and Rosenfeld met again at the Lanesborough. “We had a series of meetings over the course of the day to move from £8.30 to the £8.50 level,” says Carr. Finally Rosenfeld offered £8.40 with a 10p dividend once the offer was unconditional. In essence, she was offering the £8.50 per share. “The board’s view was that we had achieved a good price for the business,” Carr says, and they were prepared to recommend the bid.
It was dark as Irene Rosenfeld and Roger Carr made their way across Mayfair to Kraft’s advisors and bankers at Lazard on Stratton Street. They were joined by Cadbury’s advisors from Goldman Sachs.
“The transaction was secured at around 9:00 PM,” says Carr. “At that point people did shake hands.” Kraft’s PR people asked for a photograph of Rosenfeld and Carr shaking hands.
“I said no because I had never changed my position that I did not want to sell the business to Kraft,” Carr recalls. “So why do I want to
sit there having a glass of champagne on an outcome that on any other reason than value I would have preferred not to happen?” All the same, Carr felt he’d done his job: He had secured “tomorrow’s price today.” But there was no moment to toast. “If you’ve done the right thing in terms of the world in which I live, then you can continue to look in the mirror as having done the right thing—even though doing the right thing may personally leave you feeling sad and hollow.” Todd Stitzer too felt “unspeakably sad.” At 5:00 AM the following morning, he woke Sir Adrian with the news, anxious to reach him before the story broke.
The press was waiting for a statement. “The board of Cadbury unanimously recommends Cadbury shareholders to accept the terms of the final offer,” said a weary-looking Stitzer. “The deal represents good value for Cadbury shareholders,” assured Carr. The press was quick to point out that among those shareholders poised to benefit from the takeover was Stitzer himself, who reputedly walked away with an estimated £17 million ($25.5 million) in shares and options. “The strange paradox of this is that investing in the company I believe in, in the end actually was of benefit to me,” he said later. “I wasn’t in any way seeking an early end to my employment.”
According to Carr, most shareholders “were very pleased with the price achieved.” Bankers and advisors in London and New York also benefited to the tune of £400 million ($600 million). Yet some shareholders had a muted response. Legal and General Investment Management, which held 5 percent of Cadbury’s shares, was “disappointed” that the price did not reflect the true value.
Others were shell-shocked by the news. Felicity Loudon saw the outcome as “a horror story” and urged people to voice their opposition to their MP and the shareholders. On fan websites, British consumers were equally angry and outraged. “There should be a national boycott of Kraft-Cadbury,” urged one. Sites were launched to save the Curly Wurly and other beloved brands. There were financial analysts who thought the firm had been sold down the river. “Cadbury’s exit valuation,” said one industry analyst, “will rank as the lowest in the confectionery space by some margin.” The two grandsons of
George Cadbury, Sir Adrian and Sir Dominic, described the news quite simply “a tragedy.”
Irene Rosenfeld was all smiles. The glamorous winner in a red suit with a gold brooch, she told reporters that she felt “great.” Cadbury-Kraft combined was “a global powerhouse” with worldwide sales of £37 billion (over $50 billion). “Acquiring Cadbury is a significant milestone in the history of Kraft foods,” she said. “The combination of a more extensive snacking portfolio, together with an expanded global footprint and greater penetration of grocery and instant consumption outlets, creates opportunities that will truly set this company apart from its peers.”
Mars and Wrigley had been knocked into second place. Rosenfeld stood at the helm of the world’s number one confectionery supergiant.
CHAPTER
21
Gone. And It Was So Easy.
T
he hotly contested takeover of Cadbury was one of the largest completed acquisitions in British history. For many economists this is just part of an ongoing process that has brought immense benefits worldwide. Globalization helps lift millions out of poverty and distributes a wider range of products around the world at cheaper prices than ever before. In the chocolate industry, if the rationale that Kraft used to persuade Cadbury shareholders is correct and the projected synergies between the two companies are realized, then Cadbury becomes a leaner and more efficient organization and Kraft will sell more of its products overseas, creating opportunities for all Kraft employees. Investors enjoy higher profits, and chocolate goodies are produced ever more cheaply—at least that is the theory.
Sir Adrian and Sir Dominic Cadbury warned in a letter on January 20, 2010, to the
Daily Telegraph
that a high percentage of takeovers do not live up to the bidder’s claims. Kraft’s record to date, they wrote, “is of underperformance and, in the case of Terry, of failing in their stewardship of the company they had acquired.” The two former Cadbury chairmen pointed out that the value of a company reflects its reputation built up over a lifetime and the consumer’s trust that the company and its brands are one. “Cut the tie and submerge the brands in a larger entity,” they wrote, “and both present and future value will be lost.”
The difficulty of maintaining the culture of a company that is taken over is linked to the acquiring company’s debt load. In this case,
Kraft assumed an estimated £7 billion ($10.5 billion) of debt to fund the takeover, raising its total debt to a reported £18.3 billion ($27 billion). This staggering amount of debt generates fears that Cadbury will be asset-stripped and put to work to service this debt. Despite assurances from Kraft that this will not happen, the premise of the takeover acknowledged annual efficiencies of £412 million ($618 million). “Nobody knows whether or not they can achieve it,” Sir Dominic says. “They were not obliged to show where all those savings are going to come from. They also claim the synergy with Cadbury is going to produce £650 million [$975 million], but the evidence for that is not on the table. Now if you borrow all this money and say you are going to be able to pay it off by making savings, it surely is more responsible to have a much clearer view of where those savings are coming from.” Hardly surprising then that the very stakeholders whose lives George Cadbury and the pioneers were at such pains to enrich are likely to lose out sooner or later—starting with the workers.
Roger Carr himself warned that job losses were inevitable. Sir Adrian and Sir Dominic appealed to Kraft on January 20, pointing out that it had “accepted a duty to those working for the company.” And they urged Kraft “to live up to that responsibility.” Unite, the trade union that represents Cadbury workers, is concerned that up to 10,000 jobs in Cadbury worldwide could be at long-term risk. Under pressure to meet debt repayments, they fear Kraft will be more likely to cut jobs in Britain rather than on home turf in America. Unite claims that over the last ten years, Kraft has sacked some 60,000 workers to help pay for similar deals—a figure Kraft denies.
But just a week after sealing the deal, Kraft confirmed the closure of the famous Cadbury factory at Somerdale that makes Crunchie and Curly Wurlys. During the takeover, Kraft had said it believed it would be able to keep this site open, unlike Cadbury. But in an apparent U-turn, four hundred jobs now had to go. “This sends the worst possible message to the 6,000 other Cadbury workers in Britain,” said Unite. “It tells them Kraft cares little for their workers.” Union leaders and MPs were outspoken about what they saw as cynical manipulation. “Kraft has tossed away promises on jobs like a torn-up sweet
wrapper,” argued Liberal MP Matthew Oakeshott. “It has treated British parliament with contempt.”
A House of Commons Business, Innovation, and Skills Committee was set up to investigate the U-turn, but Irene Rosenfeld failed to appear, sending Kraft’s vice president for corporate and legal affairs, Marc Firestone, in her place. “I am terribly sorry,” he said. He told a skeptical committee of MPs that Cadbury’s plan to close Somerdale was more advanced than Kraft had initially thought. He also pledged there would be no further cuts in Kraft’s UK manufacturing for two years but could provide no guarantees beyond that. The MPs’ report concluded that Kraft had acted “irresponsibly and unwisely.”
The effect of the merger on the workforce is not simply worry over job security. Control of the firm will now pass from London and Bournville to Chicago. In today’s global village, the Bournville employees may rarely see their American management. Does this create an inspiring environment? “The danger is that people no longer see the reason for giving of their best,” argues Adrian. “A business which in economic terms is doing very well can lose the drive of the very people who are in it—you lose an economic benefit let alone the social implications.” It is easy to see how those whose lives are overturned by global forces beyond their control feel alienated and have low expectations. It is the opposite of what George Cadbury tried to achieve when he set out to improve a man’s lot by raising his hopes and ideals.