The Kraft-Cadbury Deal

Back in late September, I wrote this post concerning Kraft's pursuit of Cadbury. At the time, I thought little of the proposed merger, and highlighted Cadbury CEO Stitzer's insightful comments regarding institutional food buyers of the two companies' products.

This morning's news of Kraft's increased bid, for which it won Cadbury's board's approval of the deal, was probably unavoidable. But it's too bad for the assets of British confectioner.

Consider, first, the comparative equity prices of the two firms, and the S&P500 Index, over the past five years. Including the last four months during which Kraft has been stalking Cadbury.

If anything, Kraft has continued to fail to distinguish itself, probably also paying a price for what most investors evidently see as a mistaken acquisition play.

I find myself in agreement. Despite the Journal article's quote from Pershing Square hedge fund founder Bill Ackman endorsing the deal and predicting a wonderful performance outlook for the larger Kraft, I just don't buy it. There are too many potential pitfalls.

For one, there is the obvious bugaboo of trans-Atlantic culture clashes.

Next, you have a processed food purveyor with admittedly mediocre brand management skills, judging by past equity performances, hoping to excel by paying full price for a brand-sensitive business, confectionary.

Then you have the undeniable fact that Cadbury has done a better job earning total returns for its shareholders than has Kraft during the latter's CEO, Irene Rosenfeld's tenure.

Then there's the size issue. Kraft was only treading water with the S&P before this deal. What do you think will happen when it experiences the increased size and complexity of managing the merged firm, plus having to get to work improving Cadbury's performance to pay for the merger? It's really doubtful that things will get better at the merged Kraft. More likely is the larger American firm's mediocrity infecting and affecting Cadbury, pulling its performance down to that of its acquirer.

I still believe, as I did last September, that both parties would have benefited from Rosenfeld's selling Kraft's businesses which resemble Cadbury's, to the latter, taking equity in exchange.

Cadbury is simply a better management team than Kraft. If anything, I guess Cadbury shareholders should thank Stitzer and the board for getting top pound for the company, and walking away with cash after selling whatever Kraft paper they receive, while Kraft will be stuck trying to make this dubious tie-up pay off.

I wonder what Buffett will do with his Kraft shares now?