Chocolate Wars

by Deborah Cadbury

  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?

  News 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 s
ome 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.”

  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.