Tuesday, January 5, 2010

Kraft selling pizza business to raise money for Cadbury bid. Buffett says NO (KFT, CBY)

Big(ish) news this morning comes from Kraft (KFT), as they have sold their North American pizza business to Nestle for $3.7billion.  The pizza division accounts for $1.9billion in revenue and will include the transfer of 3,400 employees, along with the Brands DiGiorno, Tombstone and Jack's, as well as the California Pizza Kitchen trademark license.


"Selling this business now not only delivers an attractive return for our shareholders, but enables us to better focus our resources on priority global brands and categories," said Irene Rosenfeld, Chairman and CEO. 


The above comments were written deliberately vague for a reason.  You'd think that focusing "our resources on priority global brands and categories" would involve EXISTING brands, but you'd be wrong. Six minutes after releasing the statement about selling the pizza business, Kraft released a statement amending its offer to buy Cadbury - Kraft will use all the proceeds from the sale of its pizza business to increase the cash portion of their offer for Cadbury.  This is being done as a way to assuage Cadbury shareholder worries about accepting Kraft shares as a compensation.


"Kraft Foods is doing this because of the desire expressed by some Cadbury Securityholders to have a greater proportion of the Offer in cash and because Kraft Foods Shareholders have expressed a desire for Kraft Foods to be more sparing in its use of undervalued Kraft Foods Shares as currency for the Offer.  


Kraft Foods continues to believe that its share price is depressed as a consequence of a number of short term factors which it believes will dissipate once the uncertainty surrounding its Offer for Cadbury is resolved.  Therefore, it will apply an amount equivalent to the net proceeds from the pizza sale, estimated to be 60 penceper Cadbury Share or 240 pence per Cadbury ADS, to fund a Partial Cash Alternative to its Offer to acquire Cadbury."
At least one major investor is not on board, that being Kraft's LARGEST investor.  Warren Buffett's Berkshire Hathaway (owning about 9.4% of Kraft) has voted against Kraft's proposal to issue up to 370million shares as part of their Cadbury bid.  Among Buffett's concerns is what Kraft's board thinks their own stock is worth as currency:


"To state the matter simply, a shareholder voting "yes" today is authorizing a huge transaction
without knowing its cost or the means of payment.


What we know with certainty, however, is that Kraft stock, at its current price of $27, is a very
expensive "currency" to be used in an acquisition. In 2007, in fact, Kraft spent $3.6 billion to
repurchase shares at about $33 per share, presumably because the directors and management
thought the shares to be worth more.


Does the board now believe those purchases were a mistake and that Kraft's true value is only the
current price of $27 per share – and that it is therefore fine to structure a major acquisition based
upon that price? Would the directors use stock as merger currency if the price were, say, $20 per
share? Surely the true business value of what is given is as important as the true business value
of what is received when an acquisition is being evaluated. We hope all shareholders will use
this yardstick in deciding how to vote."


Kraft shares are up 3% in the first hour of trading, while Cadbury shares are off 4%.  Buffett's involvement here will at the very least impose some serious fiscal restraint on any Kraft bid for Cadbury.  I for one am SHOCKED that Kraft was not more  open with Buffett in terms of its Cadbury ambitions and way of financing it.



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