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This is written by Sourabh Kumar singh, pursuing a Diploma in M&A, Institutional Finance, and Investment Laws (PE and VC transactions) from LawSikho.com. This article has been edited by Amitabh Ranjan (Associate, Lawsikho) and by Dipshi Swara (Senior Associate, Lawsikho).

Introduction

2010 saw the most controversial takeover of British Cadbury by the American giant Kraft Foods. Kraft hopes to acquire Cadbury to expand its global influence, especially in the snack category from emerging markets such as India. However, Cadbury did not sell, posing a major challenge to Kraft’s search for Cadbury. Thus, Kraft initiated a hostile takeover of Cadbury in 2009, sparking extensive public discussions about the UK’s takeover code, leading the UK to modify takeover rules on how foreign companies acquire British companies. Many people in the M&A field believe that it has become too easy for foreign companies to acquire British competitors, and the process has become a bit sketchy. The acquisition and merger team responsible for overseeing this area reviewed the law and revised the Takeover Code in September 2011. This article focuses on the Kraft-Cadbury acquisition and highlights the changes made in 2011 after the acquisition.

Hostile takeovers

In friendly takeovers, the board of directors and management of a company agrees on the entity/company that is going to be acquired by another company. The target board negotiates the purchase conditions with potential buyers, reaches an agreement on the price, and finally submits the offer to shareholders for voting. In contrast, in a hostile takeover, the acquisition of a company occurs without the consent of the target company’s board of directors and management. The purchaser, also known as the predator, directly contacts the shareholders and offers to purchase enough shares to take over the target company or change the management so that the takeover can be approved.

Kraft

Kraft Foods is an American company founded in 1923. Before the acquisition of Cadbury, Kraft was the world’s second-largest food company with operations in more than 150 countries. A large part of Kraft’s global revenue comes from only 11 well-known brands, and each brand generates annual revenue of more than US$ and US$1 billion. Most of the revenue comes from developed markets in North America (U.S. and Canada) and Europe. At the time (before the acquisition), Kraft had little influence in the world’s most powerful emerging markets (except China), such as India, Mexico, Brazil, and South Africa. Entering these emerging markets and advancing into the high-growth snack market are key elements of their long-term strategy.  

Cadbury                                                                                                                                                                                   

Cadbury, a British company with a history of nearly 200 years, started from the chocolate factory in the UK in 1824 and expanded its business through organic growth and acquisitions became the world’s second-largest confectionery company with a global market share that exceeded 10%. Its product portfolio includes well-known chocolate, candy, and chewing gum brands such as Cadbury Dairy Milk, Halls, and Trident. 

Its Halls confectionery brand is the world’s largest confectionery brand, accounting for more than one-third of Cadbury’s confectionery revenue. Since Cadbury focuses on doing one thing well (chocolate and candy), this allows them to effectively penetrate the emerging market. 

Why the bid for cadbury? 

It appears that entry into emerging markets is the key driver for Kraft Foods’ interest in Cadbury. Kraft Foods has become a global leader in concentrated powdered soft drinks with ‘Tang’. However, it cannot penetrate certain emerging markets, such as India, where Cadbury’s brands are already mature and five factories produce sweets. The use of the Cadbury name allows Kraft Foods to conquer new markets, strengthens other markets already established by Kraft Foods, and, at the same time, allows it to grow its own brand and market share by maximizing profits. 

The prediction made by Kraft Foods, in which the benefits of the acquisition of Cadbury when it enters Mexico, Turkey, South Africa, and India can be observed. For Cadbury, markets such as Brazil and China have been having difficulty gaining market share and visibility; Cadbury will also benefit from this acquisition by increasing its market shares in these markets.

Cadbury products are sold by the largest retail chain in India, enabling them to reach 92% of the population of India. The acquisition of Cadbury means that Kraft products can enter India and other rapidly developing countries directly.

The acquisition timeline 

August 28, 2009- Irene Rosenfeld, CEO of Kraft, approaches Cadbury chairman Roger Carr for a possible merger. Cadbury’s board unequivocally rejected the offer.

September 7, 2009 – Kraft makes public its informal offer for Cadbury.  Kraft’s stock prices drop since the initial talks in August valuing the offer price at 745p. Cadbury’s share rose to £7.83 on the announcement, surpassing the offering price from Kraft.

November 1 – 15, 2009- Kraft reiterates its original offer of 300p in cash and 0.2589 new Kraft share.

November 15 – 30, 2009- Cadbury’s chairman indicates that Hershey might be preferred by the Cadbury board as a bidder because its values are similar. 

December 2009- Kraft’s offer is now worth 713p a share as its stock price continues to fall. With no intruder, Kraft doesn’t feel compelled to revise its offer.

January 1 – 10, 2010- Kraft sells its frozen pizza business to Nestle for $3.7 billion. Nestle confirmed it will not bid for Cadbury.

January 11 – 18, 2010- Cadbury again rejects Kraft’s offer as it announces that sales rose 5.0% in 2009. Kraft’s CEO visits the UK for a series of investor meetings. Many decline meetings indicating that the offer should be above 800p per share. No change in the offer price.

January 19, 2010- Kraft submits a revised offer that was eventually supported by the Cadbury board. Cadbury announces a special 10p dividend.

Kraft Cadbury post deal impact 

February 10, 2010: Kraft closes Cadbury plan: Kraft is accused of violating its apparent commitment to open a Cadbury plant in Summerdale, near Bristol. The factory has over 4000 employees and is scheduled to close by Cadbury in 2011. 

March 5, 2010: Kraft deal hits Cadbury employees with a triple blow

Cadbury employees suffered a triple blow after news that Kraft Foods was preparing to close the final salary pension plan from the British pastry chef. To open up to new members, increase employee contributions and eliminate up to 150 jobs. 

March 16, 2010: Call for the adoption of the “Cadbury Act” as Kraft’s stage for MPs to have a barbecue. The union representing the 6,000 British Cadbury workers asked parliamentarians for better protection for the employees of the newly acquired companies. 

March 17, 2010: Kraft apologises: After being accused by members of parliament of fighting for the control of Cadbury, Kraft made a humiliating public apology and vowed not to lay off any manufacturing jobs in the UK for at least two years. The promise only covered 40% of the UK employees in the expanded company, which made Americans feel that Shock.

August 5, 2011: Kraft will split into two companies Kraft planned to split the food giant only 18 months after the controversial acquisition of British chocolate maker Cadbury. This division will provide investors with the opportunity to bet on the fast-growing snack business in emerging markets, or choose to receive stable dividends from the slower-growing general grocery business.

September 19, 2011: UK Tightens Its Hostile Bidding Rules -The British takeover Commission has strengthened its hostile bidding rules to correct what it calls the “tactical advantage” of bidders. The commission said the hostile practices would have a destabilizing effect on the acquired company, adding that the results of the tender were “inappropriately affected.” 

Amendments after the cadbury acquisition

In the light of unfavourable public comments after Kraft’s acquisition of Cadbury, the British takeover Group with encouragement from the British government, conducted a negotiation period in the United Kingdom on the possibility of some key changes in acquisition. 

Therefore, it is recommended that the code be revised as follows:

  • Requires a method of naming potential bidders in the advertisement at the beginning of the bidding period, regardless of who publishes the advertisement; 
  • And requires any public name unless approved by the expert group. The potential bidder must be within a fixed period of four weeks from the date of the potential publicly appointed bidder.
  • Declares the final intention to make the offer (of in accordance with Rule 2.5);
  • Or declares that it will not bid, so it will be subject to the rules The restriction mentioned in rule 2.8 (that is, it will not be able to bid within six months); 
  • The target company jointly requests an extension of the term and explains the expected schedule for the announcement with intention to determine the offer under Rule 2.5, and then an announcement is generally required to update the status of the discussions in the market and the revised deadline. 

How was the Kraft : Cadbury deal restructured?

After completion of the acquisition, the Kraft Group reorganized and formed Mondelez International and Kraft Corporation. The business categories are Mondelez International and Kraft. Mondelez is entrusted to the snacks business and Cadbury becomes its subsidiary. The company runs the grocery business of the former Kraft Foods Group. Additionally, Kraft and Heinz merged to form Kraft Heinz in 2015, and Heinz owns 51% of the company’s shares. In today’s time, it is the third largest food and beverage company in North America and the fifth largest in the world. On the other hand, the American chocolate company Hershey owns the rights to the Cadbury brand in the United States, which was acquired from Cadbury Schweppes in 1988. In 2016, Mondelez initiated a takeover bid for Hershey, but it was rejected by Hershey’s board of directors.

Conclusion

Cadbury’s attractive financial situation during the recession made it a lucrative M&A option in the confectionery industry in 2009. After two bids were rejected, Kraft made a hostile offer to acquire Cadbury. The acquisition made headlines in the industry and raised serious questions about the British takeover law. After this controversial acquisition, the takeover panel was forced to update and revise their takeover Code.

References


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