Kraft’s sweetened takeover bid for Cadbury turned sour yesterday, when Warren Buffett, the world’s second-richest man and the largest shareholder in the American food giant, said that the deal made him “feel poor”.
With the combination of charm and bluntness that has made him the darling of stock market investors the world over, Mr Buffett described Irene Rosenfeld, Kraft’s chief executive, as a “perfectly decent person” whom he would quite happily have as a trustee to his will — before going in for the kill and declaring: “If I had a chance to vote on this, I would vote no.”
The takeover does not need to be approved by Kraft shareholders under New York Stock Exchange rules because Kraft is issuing less than 20 per cent of stock to fund it.
But, just to make sure that Ms Rosenfeld got his message, Mr Buffett added: “She thinks this is a good deal. I think it’s a bad deal.”
Kraft shares reacted immediately, dropping by 2.5 per cent by midday.
Advertisement
Nevertheless, Ms Rosenfeld, who has showed a predator’s steely determination throughout her five-month battle for Cadbury, is unlikely to be phased by Mr Buffett’s intervention.
As Peter Langerman, chief executive of Mutual Series, a subsidiary of Franklin Resources and Cadbury’s largest shareholder, with more than 7 per cent of its shares, pointed out, she is able to give as good as she gets. “I would give Irene credit in that there are not too many people who could go eyeball-to-eyeball with someone like Buffett. I think that says something about her resolve,” he said. He added that he supported the deal.
Mr Buffett, who made his remarks in an interview with CNBC news, suggested that the Cadbury takeover may have been pushed forward in a frenzied “deal momentum” fuelled by investment bankers. His objection, he said, was that Kraft had overpaid.
Although Kraft says that it is paying a multiple of 13 times earnings before interest, tax, depreciation and amortisation, Mr Buffett said: “The actual multiple, if you look at the value of Kraft stock, is really 16 or 17 times. It’s hard to get rich doing that.” He added that Kraft had sold its frozen food pizza business to Nestl? this month for too little. Despite his reservations, Mr Buffett said that he would not sell his stake of more than 9 per cent in Kraft. “That gets expensive,” he said.
Kraft issued an immediate rebuttal of Mr Buffett’s remarks. “We respect Buffett’s opinion — he’s one of our largest investors. We think this is a good deal for us. It transforms our portfolio for better long-term growth. It’s five cents accretive to earnings in 2011. It has mid-teens IRR (internal rate of return). All while maintaining our investment grade credit rating and dividend,” the company said.
Advertisement
In a separate move, Vince Cable, the Liberal Democrat Treasury spokesman, said that he was writing to Lord Mandelson, the Business Secretary, to complain that Kraft’s takeover of Cadbury was being part-financed by the Royal Bank of Scotland. “It is particularly galling then that state-owned RBS should part-fund this takeover when it is clearly not in the interests of the UK economy,” he said.
Mr Buffett was speaking ahead of a meeting of shareholders in Berkshire Hathaway, his investment vehicle, to vote on splitting its Class B shares, a move that will make them more affordable, at roughly $67 per share, compared with the existing price of more than $3,000. The fifty-for-one stock split is linked to Berkshire Hathaway’s plan to buy the Burlington Northern Santa Fe (BNSF) railway corporation and will enable Berkshire to offer even small BNSF shareholders Berkshire stock as part of its $26.3 billion cash and stock deal. Mr Buffett said the split was necessary, but he enjoyed issuing Berkshire shares “as much as I enjoy prepping for a colonoscopy”.
Why are opposites attracted?
Analysis: Helen Power
Lord Mandelson of Hartlepool and the Sage of Omaha are unlikely bedfellows. Yet the Business Secretary and world’s second-richest man teamed up in a bizarre double act yesterday to express their distaste for Kraft’s takeover of Cadbury.
Advertisement
Nothing either of them had to say will stop Kraft’s £11.7 billion recommended takeover of Cadbury. While the political benefits of Lord Mandelson’s outburst are obvious, the motivations of the billionaire investor are more of a mystery.
Mr Buffett, Kraft’s biggest shareholder, can’t stop the deal because it is not dependent on a shareholder vote. When Irene Rosenfeld, Kraft’s boss, increased the cash element of her offer to Cadbury shareholders, she also reduced the number of Kraft shares she had to hand over to them and got herself out the requirement under US law to put the deal to her own shareholders.
Even if Mr Buffett were to start a campaign for Ms Rosenfeld’s head — and win it — Kraft would still be tied to its promise to buy Cadbury.