This article has been written by Asmita Topdar, pursuing a Diploma in M&A, Institutional Finance, and Investment Laws (PE and VC transactions) from LawSikho
The year 2010 witnessed the most controversial takeover of the UK-based firm Cadbury by American giant Kraft Foods. Kraft wanted to acquire Cadbury to increase its global reach especially in emerging markets like India under the snack category. However, Cadbury was not up for sale and this posed a major challenge for Kraft to pursue Cadbury. As a result, Kraft launched a hostile bid to takeover Cadbury in 2009 which led to a widespread public discussion regarding the Takeover Code of the UK thereby prompting a revamp of the UK takeover rules governing how foreign companies can purchase UK companies. Many in the world of mergers and acquisitions felt that it had become too easy for foreign firms to buy UK rivals and the process had become a little murky. The Panel of Takeovers and Mergers, which regulates this area reviewed the laws and in September 2011 changes were made to the Takeover Code. This article discusses the Kraft – Cadbury takeover and highlights the amendments introduced in 2011 in the wake of the takeover.
Cadbury : the UK confectionery company
The second-largest confectionery brand after Mars, Cadbury was founded by John Cadbury in Birmingham, London in 1824 and presently has its headquarters in Uxbridge in West London. Cadbury has grown through mergers and demergers which involved mergers with J. S Fry and Sons in 1919 and with Schweppes in 1969 until 2008. In January 2010, it was acquired by Kraft. Ownership of the company was 49 percent from the US, despite its UK listing and headquarters. Only 5 percent of its shares were owned by short-term traders at the time of the Kraft bid.
Kraft foods : the American giant
Kraft Foods Inc.’s origin dates back to 1923 when it was founded by James L. Kraft. Started as a door-to-door cheese business, it later developed into a multinational confectionery and food conglomerate with a presence in more than 170 countries. At the time of Cadbury’s takeover, Kraft was the 2nd largest food conglomerate with seven brands that each generated annual revenue of more than $1bn. In 2012, it underwent a spin-off thereby establishing 2 companies – Kraft Foods Group and Mondelez International. The North American grocery business was named Kraft Foods Group while the remainder of Kraft Food Inc. was named Mondelez International which had the confectionery and snacks business within its ambit. Cadbury has been made a subsidiary of Mondelez international. In 2015, Kraft Food Groups merged with Heinz to become the 5th largest food and beverage company in the world.
What happened in the Kraft : Cadbury takeover?
During the great recession between 2007 and 2009, due to a fall in sales, the confectionary industry started considering mergers of the companies to thrive and benefit from economies of scale. Kraft was interested in acquiring Cadbury due to its high growth rate even during the recession period. A major reason for Cadbury’s steady performance during these tough times of recession was owed to its global presence especially in emerging markets like India, which became the point of attraction for Kraft to pursue Cadbury.
At the initial stage, Kraft offered $16.3 billion or 740pence per share which was rejected as it undervalued Cadbury and was seen as an unattractive offer. The offer was not reflective of Cadbury’s strong brand name across the nations and its extensive consumer base. Shortly after the first bid, Kraft offered a second bid which consisted of an offer of £10.1 billion ($17 billion, same terms as the first bid in September-300 pence in cash and 0.2589 Kraft shares per Cadbury shares. The bid value was lesser than Cadbury’s closing share price for that day and as a result, Cadbury rejected the second offer on the grounds of undervaluation. In a letter to Kraft, Cadbury’s chairman had then been quoted as saying – “Under your proposal, Cadbury would be absorbed into Kraft’s low growth, conglomerate business model, an unappealing prospect which contrasts sharply with our strategy to be a pure-play confectionary company.” Soon the bitter battle saw the involvement of other companies like Hershey’s, Ferrero, Kohlberg Kravis Roberts & Co, and Nestle who joined the bidding battle to pursue Cadbury. However, on January 18, 2010, Kraft launched a hostile bid to takeover Cadbury for the US $ 19.5 Billion. After almost 4 months of continuous resistance, the two companies struck a deal of acquiring Cadbury for 840 pence per share plus a special 10 pence per share dividend. This was approved by 72 percent of Cadbury shareholders two weeks later. Kraft had agreed and gave assurance that all the previous contractual employment rights of Cadbury’s employees will be retained.
What were the challenges faced post the Kraft : Cadbury takeover?
The takeover had faced many challenges post the completion of the deal. After guaranteeing good employment conditions for Cadbury’s employees and continued operation of the Somerdale Plant in Bristol that Cadbury had announced in 2007, the plant was closed within less than a few months after the deal was struck. Kraft’s volte-face over the Somerdale factory sparked an outcry over the perceived imbalance of power in the UK corporate takeover process. This invited huge outcry among the public and labors group as it led to the axing of almost 500 jobs. Apart from employee layoffs, there involved issues related to high debt. Kraft was already in a position with high monetary debt which was further worsened with the debt borrowed for funding the takeover of Cadbury. Kraft was forced to sell off its frozen pizza business for financing the takeover. This resulted in Kraft incorporating a cost-cutting approach and thereby having a direct impact on employees, their jobs, and their monthly wages. Further, this takeover resulted in bringing the UK takeover regulations under scrutiny as it provided for a weakened regulatory position for the target entity. The takeover was also resisted by the UK government. Remarking about the situation, Jennie Formby, Unite’s national officer for food and drink, said: “This is a very sad day for U.K. manufacturing. A successful, iconic, independent U.K. brand will now be owned by a giant company with massive debt. These challenges led the Takeover Panel to revamp the UK Takeover Code and introduced a series of reforms in the Regulations to protect the target company in such takeovers.
What were the amendments introduced in the UK takeover code post-Cadbury takeover?
The following amendments were given effect on 29 September 2011. The Code Committee ultimately decided to implement several of the proposed amendments, with the key aims of – redressing the balance of power in favour of offeree companies; ensuring that greater account was taken of the position of persons affected by takeovers in addition to offeree company shareholders, most notably employees; and increasing transparency and improving the quality of disclosure.
Introduction of PUSU Rule
The Takeover Panel following the controversial Cadbury takeover decided to introduce PUSU – Put up or shut up rule wherein the offeree was required to make an announcement regarding any possible offer, or any approach made by any company for such takeovers. Further, the offeror within 28 days from the PUSU deadline where the offeror was named by the offeree was required to either announce its intention of making the offeror that it is not interested in making the offer. In case the offeror company declines such intention of making the offer, the offeror cannot for the following 6 months cannot participate or offer to takeover the target company.
Prohibition on certain deal protection measures
Offer-related arrangements like inducement/break fees, non-solicitation undertakings, and matching rights granted by an offeree in favour of an offeror were outlawed, except in certain very limited circumstances. The main objective behind such amendment was to protect the target company from such complex arrangements wherein the target Board is imposed upon such onerous conditions and they are compelled to agree on such terms.
Intention statements regarding business and employees
Previous to 2011 amendments, companies have been mandatorily required to disclose their intention about the commercial rationale behind making an offer, their strategic business plans for the target company along their plans regarding the target’s employees. The 2011 amendment required the offeror company to comply with their intention statements and all the disclosures made in relation to the business plans and employees of the target company for a period of 12 months from the conclusion date of the offer or as specified by the bidder. Post Pfizer – AstraZeneca takeover in 2015, this regulation was supplemented with a new rule wherein the rule was bifurcated in two approaches – “post-offer intention statements” and “post-offer undertakings.”
Enhanced disclosure requirements
Since 2011, offer documents must contain additional information on the offeror’s bid financing and any facilities which will be used to refinance the offeree’s existing indebtedness, including repayment terms, interest rates, maturity dates and key covenants, and the relevant debt documents must be put on display. Disclosures regarding estimated fees under the category of PR, legal, finance, account needs to be made by both the offeror and the offeree. Any excess of actual fees over 10% of estimated needs to be additionally disclosed.
How was the Kraft : Cadbury deal restructured?
Following the completion of the takeover, Kraft Group has been restructured and been spun-off to form two companies Mondelez International and Kraft Inc based on the business category wherein Mondelez has been entrusted with the snacks business with Cadbury now being made it’s subsidiary while Kraft Inc is handling the grocery business of erstwhile Kraft Foods Group. Moreover, in 2015 Kraft merged with Heinz to form Kraft Heinz, with Heinz holding a 51% share in the company. It is currently the 3rd largest food and beverage company in North America and 5th largest in the world. On the other hand, the US chocolate company, Hershey, owns the rights to the Cadbury brand in the US, which it acquired in 1988 from Cadbury Schweppes. Hershey dominates the US chocolate market. In 2016, Mondelez launched a takeover bid for Hershey, but the bid was rejected by Hershey’s board. Also, despite having agreed on the fact that Cadbury would continue with its operation from London, post the turnover the headquarters of Cadbury was shifted to Zurich in Switzerland. Similar was the situation when the production of Dairy milk chocolates was shifted from Britain to Poland.
The attractive financial position of Cadbury during the recession made it a lucrative option for merger and acquisition in the confectionary industry back in 2009. After making offers on two occasions and getting rejected, Kraft launched a hostile bid to takeover Cadbury. The takeover made headlines in the industry raising serious questions regarding the UK takeover Code and its weakened position due to which foreign companies could easily end up buying the British companies. In the wake of this controversial takeover, the Takeover Panel was forced to revamp and introduce amendments in the UK Takeover Code. There many challenges faced along with the restructuring of the deal post the takeover. The bottom line can be found in the statement of Batstone-Carr when he remarked – ‘In the end, it could be said that the Cadbury executives caved in rather meekly. Maybe their remuneration had something to do with it; but had these executives defended their updates more vigorously, the story of Cadbury may have been different’.
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