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The Cadbury Defence

The general public view of Cadbury was that it was a much loved, family-run British chocolate
business. Whilst the brands were popular all over the world, the company shares had been shunned
by UK investors for some time, the family had not worked in the business for a decade, the company
produced more chewing gum than chocolate, employed only 20% of its workforce in the UK and was
50% owned by North American investors.

Yet when Kraft launched its bid for Cadbury in late 2009, the popular press portrayed Cadbury as a
British icon with Kraft as an uncaring American corporation which would be an unsuitable parent. A
headline in The Sun newspaper in January 2010 had been typical: ‘Is another chunk of Britain going
abroad as Cadbury face foreign takeover?’ Yet speaking to a lecture audience in May that year at
Cass Business School, Roger Carr, the Chairman of Cadbury plc, insisted that despite strong political
pressure his defence team had done its duty by shareholders – by robustly defending the company
until the price of independence was exceeded by the shareholder value created by sale.

Instead of wrapping the company in the Union Jack flag to ward off its suitor, Cadbury had
manoeuvred its potential acquirer into paying 850 pence per share – almost fifty percent more than
Cadbury’s undisturbed share price of 568p. That, according to Carr’s team, was the second largest
control premium in UK corporate history – and all the more remarkable, given the fact that there were
no offers from competing bidders. As Mark Burgess, head of equities at Legal & General, Cadbury’s
biggest British shareholder, said in The Sunday Times the weekend after the final deal was
announced, ‘[Carr] conducted an extremely good defence, maybe too good. But he was in an
impossible position,’ referring to the shareholders wishing to sell at Kraft’s offer price. And yet the
morning after the takeover deal was announced, there were contrary opinions as well: David
Cumming, the head of equities at Standard Life investments and, by that point a relatively minor
institutional shareholder in Cadbury, was interviewed on BBC Radio 4 and suggested that the
Cadbury board should have held out for an offer of 900p. But ultimately, the Board knew that its
fiduciary duty and legal responsibility was to act in keeping with the majority of shareholder opinion.

Cadbury and its Ongoing Restructuring

At the time when Carr took over as Chairman in July 2008, Cadbury was unloved by investors.
Nelson Peltz had lobbied its investors to demand a change in the direction of the Company. (Peltz,
an activist investor through his investment vehicle, Trian Fund Management, owned over 3% of
Cadbury at the time of the Kraft bid, but also 0.63% of Kraft.) One of the first things that Carr did as
Chairman was to meet each major institutional shareholder and ask them to give his inherited
management team one year to fix Cadbury. He agreed a plan with management that set new profit
goals for the company, based on delayering management, reducing operational cost, accelerating
new product development and lifting the pace of change within the company. Todd Stitzer, the CEO
and his team set about implementing the plan with commitment and vigour.

Although a company steeped in history, it had survived its conversion to a publicly-listed company
and the end of the involvement of the Cadbury family many years earlier. It had been founded in
1824 by John Cadbury in Birmingham, England, when he opened a grocery shop. As a Quaker, he
believed that the drinking of alcohol was bad for society and therefore encouraged using teas, coffees
and chocolate drinks as healthy alternatives. In 1897, they launched their first chocolate bar, and
introduced their most popular products, Dairy Milk and Creme Eggs, in 1905 and 1923, respectively.
The company had a history of growth by acquisition, starting in 1919 when they merged with J.S. Fry
& Sons, another chocolate manufacturer. More recently, in 2000, led by the chief strategy officer,
Todd Stitzer (later to be the CEO), they purchased Snapple and then, in December 2002, the second
largest chewing gum business in the US, Adams (with brands such as Trident sugar-free gum,
Dentyne chewing gum and Halls cough drops). In 1969, it had merged with the Schweppes (drinks)
to become Cadbury Schweppes plc, but then demerged in 2008, finally exiting the drinks business to
focus entirely on confectionery.
This case study has been written by Scott Moeller and case writer Alex Ritson of Cass Business School, City University as a
basis for classroom discussion rather than to illustrate effective or ineffective handling of an administrative situation. The case
was made possible by the co-operation of Cadbury plc.

© 2011 S Moeller, Cass Business School

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Around the time of the demerger, Carr, an experienced board member since 2001, took over as non-
executive chairman. He also was chairman at another FTSE 100 company, Centrica, and had been
involved in many acquisitions in his executive positions over the years, including, when he was
chairman of Thames Water, its sale for £4.3 billion to RWE. Cadbury’s new strategy was only just
beginning to show results. Yet the institutional shareholders in the UK had not returned, and the
ownership of the company remained heavily weighted towards the United States. Although some
investors understood the longer-term strategy (Gamco Asset Management said their five-year outlook
for the company showed a share price that should be in the range of 890p per share and later
awarded Carr with their ‘Hall of Fame’ award for his focus on shareholder value), most were looking at
the short-term results.

Kraft: The Unwelcome Bidder

Almost since its founding by James Kraft in 1903, when he began distributing cheese door-to-door in
Chicago, Kraft has grown by acquisition – buying, selling and even being bought itself. The offer for
Cadbury was just the most recent in a long list of targets that started in 1916 with the purchase of a
Canadian cheese company. By 2009, it was the world’s second largest food company with sales of
over $40 billion in the snacks, confectionery, beverages, cheese, convenience meals and grocery
segments of the consumer food industry, operating in over 70 countries. Their business included
seven brands with annual revenues of over $1 billion each: Kraft cheese, dinners and dressings;
Oscar Mayer meats; Philadelphia cream cheese; Maxwell House and Jacobs coffee; Nabisco cookies
and crackers, including Oreo cookies; Milka chocolates and LU biscuits. There were an additional 50
brands which each had over $100 million in sales annually.

Its Chairman and CEO, Irene Rosenfeld, had a long history with Kraft, having joined in 1981 and
ultimately rising to be the President of Kraft Foods North America until she left to be Chairman and
Chief Executive of Frito-Lay (a division of PepsiCo, Inc) from 2004 to 2006, when she rejoined Kraft
as CEO, taking on the additional role of Chairman in 2007. Soon after re-joining the company, and
partly in response to pressure from Peltz and other investors, she had arranged the sale of the Post
cereals businesses for around $2.8 billion and the purchase of the LU biscuit business for €5.1 billion.

A Bear Hug Ultimatum

It was the start of a late summer weekend – Friday, 21 August 2009 – when Carr had first been
contacted by Rosenfeld. He had just passed through passport control at Lisbon airport when he felt a
buzz in his pocket. He listened to a message that would change his plans for the next five months:
‘Hello Roger. This is Irene Rosenfeld of Kraft. I would like to come and introduce myself – and have
a conversation with you. Give me a call as soon as possible please. Thank you.’

A meeting was arranged for Friday, 29 August to take place in Carr’s Centrica offices in one of the
most exclusive streets in Mayfair. At that meeting, Rosenfeld proposed the acquisition of Cadbury by
Kraft worth (at the then market price of Kraft’s own shares) 745p a share, to be paid for with a 60/40
stock/cash split. The meeting was followed up by a letter outlining her proposal which was subject to
finance. She gave Cadbury a deadline of five days to respond.

It was Bank Holiday Monday, 31 August, that Carr assembled his defence team to discuss a proper
response. ‘Project Eagle’ was born. That team first met in Goldman Sachs’ offices in Fleet Street.
The team included the Cadbury Board with some of the best M&A advisors in London: Karen Cook,
President of Goldman Sachs Europe, Matthew Westerman, Head of Global Equity Capital Markets at
Goldman Sachs, Simon Robey, the head of Morgan Stanley UK and chairman of global M&A,
Stephen Cooke, partner and head of M&A at Slaughter and May, and Nick Reid and Tim Waddell,
who were joint heads of investment banking at UBS.

Kraft made their offer public, announcing their general intention to bid, without a specific timeframe, to
the London Stock Exchange on Monday, 7 September. The Cadbury share price immediately rose to
close up 38% at 783p, while the FTSE 100 index rose 1.7%. Kraft closed the next trading day down
about 6% in a market that rose just under 1%.

On behalf of the Cadbury Board, Carr rejected the approach in a letter that was also made public on
Sunday, 13 September. He stated that the Board considered the proposal to be one that was

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‘unattractive and fundamentally undervalued the Company.’ He also stated that Cadbury would be
‘absorbed into Kraft’s’ low growth conglomerate business model – an unappealing prospect that
sharply contrasts with the Cadbury strategy of a pure play confectionary company’.

For the senior Cadbury executives, it was certainly not ‘business as usual’ at the headquarters in
Uxbridge at the far western end of London’s Metropolitan underground line, despite being a pleasant
place to work – a huge, futuristic glass and steel building that was almost in the countryside. Each
day’s newspapers were scanned for their fresh crop of rumours and stories about the deal. The
global financial press swirled with rumour and speculation.

The Arbs Start to Circle

From the moment Kraft’s plan to take over Cadbury was announced, an increasing number of
Cadbury shares were bought by hedge funds – otherwise known as arbitrageurs, or arbs. Hedge
funds owned only 5% of Cadbury’s stock in early September 2009, but after the announcement, a
buying spree commenced. The aim of the arbs is to buy shares in the target company before a deal is
confirmed and sell them for a profit to the would-be acquirer after the share price has increased
during the deal negotiations. Using leverage, the potential profits from this activity can be enormous.
However, the risks are high: if the deal falls through, the hedge funds are left holding shares bought
during a takeover frenzy that could easily fall to their pre-offer price. For shares bought with borrowed
money, this can be ruinous.

The logic of successful arbitrageurs is that the takeover situations in which they win usually make up
for those occasions when they make a loss. Arbitrageurs are not sentimental. It is generally
recognised that they will sell at any price at which they can realise a profit. Loyalty, tradition or a
company’s long-term plans will have little influence over them. They paid little attention to Cadbury’s
claims that the stock was undervalued. By the end of the takeover battle, they represented more than
a third of the entire Cadbury share base. Groups such as Paulson & Co, Eton Park Capital
Management, York Capital Management, Mason Capital and Franklin Resources were willing takers
of any shares that any long-term investor wanted to sell. California-based Franklin was soon to be
the largest shareholder (at 7.6%), overtaking London-based Legal & General. For Cadbury’s
management team, this was an increasing worry. It meant that one third of their shareholders would
almost certainly sell to Kraft, as long as they were making even a very small profit.

The Cadbury defence team all spoke of how the company was in constant contact with their
shareholders, asking them at what price they would sell their Cadbury shares and encouraging them
not to let Kraft ‘steal’ the company. Westerman from Goldman Sachs said that for Carr, this was a key
plank of the defence. ‘He was the agent of shareholders and he spent probably more time than any
other chairman that I've been through this process with of directly canvassing shareholders’ views and
using us as his eyes and ears in the market to ensure that he knew exactly where people were, day in
and day out.’

As the takeover progressed, Westerman described how more and more of the long-term holders of
Cadbury shares sold to lock in a profit. ‘What happened here post the bid was that we did see some
churn in the register. The churn mostly came from US institutions who top sliced their holdings or who
disappeared completely. [They did so] on the basis that they were able to realise a significant gain on
their original investments – a lot of them had bought in the three and four pounds marks, and were
able to sell in the high sevens to eights. And those shares ended up partially in the hands of UK
institutions, who took the opportunity to buy more shares. But they mostly ended up in the hands of
the hedge funds.’

Waddell of UBS agreed … and suggested that the key point to understand is that hedge funds are not
able to buy stock, and thus be in a position where they can decide the future of the company, unless
the long-term owners of the stock have already made the decision to sell their holdings. ‘Clearly
arbitrageurs quite quickly become a material element of these situations. They are value focused, the
same as anyone else is value focused, but they tend to be focused on the shorter term rather than
longer term. One point is that people throw up their hands in horror at arbitrageurs piling into poor
defenceless UK companies and selling them down the river. But arbitrageurs have to get their stock
from somewhere. Somebody is selling it to them. Where are they getting the stock from? They are

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getting the stock from long funds who are selling the stock in the market. They have a responsibility to
manage their risk. They have obligations to their underlying investors to provide the best return.’

So Where Does the Power Really Lie?

Westerman says the key power lies with long-term institutional investors and not with the hedge
funds. It is only when these long-term investors have decided that they are ready to sell that the
power is transferred to arbitrage-focused hedge funds. ‘At the end of the day, it's rather like selling
your house. It totally depends upon what price people are willing to sell at. You can play back that
conversation of “was that the hedge fund buying or was it the US institutions selling?” Ultimately, it is
the seller. It's “do you want to sell your house as much as I want to buy it?” You're not going to move
out unless you’re going to sell it.’

This shift in the ownership of Cadbury didn’t go unnoticed in the press and was highlighted later by
Lord Mandelson, the British government’s Secretary of State for Business, Innovation and Skills. Yet
Robey of Morgan Stanley believes the complaints about the role of hedge funds in takeover deals are
coming from commentators who don’t understand how the system works, saying ‘the arbitrageurs
only become big features because they're sold shares by non-arbitrageur shareholders. I could
perfectly well understand why they are – if you’re long stock at 820p and you're worried it may go
back down to six [pounds], and you have a fiduciary responsibilities to a whole bunch of end
investors, it makes sense to sell some of the shares at 820p. And who do you sell them to? You sell
them to somebody who regards it is good business to buy them at 820p and sell them at 830p, on
some leveraged basis, held over a very short time frame. It's the way markets work. You know, it’s
willing sellers selling to willing buyers who happen to have a different time frame in mind.’

The Phoney War

The Kraft takeover of Cadbury was governed by the code of the UK Takeover Panel. This code is the
set of rules which have been developed since 1968 and have statutory authority in the United
Kingdom under the 2004 EU Takeovers Directive and the UK Companies Act of 2006. Its objective is
that the bid process should generally be concluded within three months. Longer than this and there is
a risk that the battle will distract the management of the target from their day-to-day work of running
the company, thereby creating uncertainty for managers, employees, customers and suppliers, and
ultimately resulting in a loss of value for shareholders. However, that timetable doesn’t start until
there is a formal offer, and at this point Kraft had only announced its intent to bid at the price
indicated. They also had not shown yet how they were planning to raise the cash.

As a formal written offer had not yet been made, on Tuesday, 22 September 2009, Cadbury applied
to the UK Takeover Panel for ‘Put Up or Shut Up’ – by which a deadline is imposed on a potential
acquirer to clarify its intentions. The UK Takeover Panel approved the application on Wednesday, 30
September, giving Kraft a ‘tight timetable’ of just six weeks to ‘put up’ and announce a formal bid or
‘shut up’ and walk away. Had Kraft elected to ‘shut up’, the Takeover Panel could have imposed a six
or even twelve month moratorium on a subsequent offer.

The weeks which followed were known within the Cadbury defence team as ‘the Phoney War’.
Newspapers were full of speculation about the takeover saga, although little of consequence actually
happened. The Cadbury advisors, together with the internal Investors Relations team, spent most of
their time during this period on the phone to shareholders, large and small. The aim was to compile a
database which would show at what price investors would sell their shares – because at the right
price, they always would sell. And as with any takeover, there were a growing number of familiar
names appearing on the share register.

Mark Reckitt, the Chief Strategy Officer of Cadbury, described the database that was produced by this
process, in which the Cadbury team regularly telephoned hundreds of investors, encouraging them to
hold out for value and determining at what price they would sell their shares: ‘It literally lists the
shareholders in order of size, the amount of the holding, how their holding has changed since the start
of the bid, and a range, which is our estimate of the price at which they would sell out … And based
on that, there’s a very simple sort of bar chart analysis that says at 800p, X percent of the share
register would accept. At 820p, Y percent, and so on. And the people, as you can imagine, at the low
end were mostly the US value funds, and the people at the high end were mostly the UK long-only

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funds.’ The internal analysis had a long list of institutions on the left. To the right of each entry was a
bar which started at 600p and went up to 1000p. For each institution, the left hand portion of the bar
was red and the right hand portion was green. Where the two colours met, the institution was ready
to sell its shares.

The release of Cadbury’s third quarter results three weeks later, on Wednesday, 21 October, was
greeted with great enthusiasm by stock analysts. Andrew Bonfield, Cadbury’s Chief Financial Officer,
had included an upgraded profit forecast, predicting that revenue growth for 2009 would be in the
middle of the previously-stated 4-6% range, while margins would improve by 135 basis points from
their 2009 level of 11.9%. The press release was accompanied by a short statement about Cadbury’s
‘unique’ culture that would be lost if it were swallowed up by Kraft. Shares continued to hover close to
800p – remaining at the level of more than 40% above their undisturbed price.

The Colour of Money

It wasn’t until Monday, 9 November that Kraft made its formal announcement of an offer. But despite
Cadbury’s strong performance and the current share price around 800p, they had not changed their
offer from what had been indicated earlier. The formal offer was for 300 pence in cash and 0.2589
new Kraft Food shares in exchange for each Cadbury share, making the bid worth 717p a share.
Notably, in real terms the bid was worth 28p per share less than when it had first been proposed by
Rosenfeld in Carr’s office as the fall in the value of Kraft shares meant the 60% of the bid represented
by Kraft shares was actually worth £400 million less than when it was first mooted. Having made the
announcement, Kraft was now obliged to provide full details to the market within 28 days.

White Knights to the Rescue?

The news that both Ferrero of Italy and Hershey of the United States were also potentially interested
in buying Cadbury first hit the press on Wednesday, 18 November. Regarding a potential Ferrero
link, what was not fully appreciated by many commentators was that Ferrero was a family-owned
Italian chocolate company. The two men who were heirs to the Ferrero throne were keen to talk to
Cadbury, but their father – who was ultimately the boss – was not, and the discussions with Cadbury
never progressed.

Hershey was different. Earlier, James Nevels, non-executive Chairman of The Hershey Company,
had approached Carr. Carr was pleased to receive the unsolicited call as he felt that, if a deal were to
be done, the natural fit was with Hershey. Hershey was regarded by most observers as an American
version of Cadbury. But where Cadbury had grown from its Quaker roots to become a multinational
publicly-traded company many years earlier, Hershey was still controlled by a charitable trust and had
remained in its home market. Nonetheless, the two companies shared a great deal of ideology and
business – and Cadbury used Hershey’s distribution network in the United States, in preference to
building its own.

Nevels indicated that the Trust had given him permission to speak to Cadbury but he needed more
due diligence information – and even a price at which the deal could be agreed – before he could get
the support of the Hershey board. What followed were several months of inconclusive discussion
between the Cadbury and the Hershey teams, where the latter team sought unsuccessfully to reach
an alignment of view between the Hershey trust, operating board and independent directors

Then, during the last week of November, the papers were full of speculation about a third potential
bidder: Nestlé, the world’s largest food company. That was one company with a clear ability to out-
bid Kraft.

Zero Hour – Posting Day

Kraft posted its offer document with three days to spare, delivering the 180-page circular to the
London Stock Exchange on Friday, 4 December. From this point onwards, it could improve its offer
but it could not be changed without the approval of the Takeover Panel. Having it in black and white
meant that the 60-day timetable which dictates how City of London takeovers play out was now
ticking.

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Some of the largest headlines the following day covered the surprise comments of Lord Mandelson
that evening. Speaking in Birmingham, the city where Cadbury had been founded, he said that
foreign ownership of British firms could damage the country. He issued a warning that the British
Government would scrutinise any foreign takeover of Cadbury and oppose any buyer that fails to
‘respect’ the historic confectioner. ‘If you think you can come here and make a fast buck, [you] will find
that you face huge opposition from the local population...and the British Government’ he said, adding
‘We expect long-term commitment, not short-term profit, to rule’. The comments must have shocked
Kraft, but they also surprised Cadbury management, who had continually refused to ‘wrap themselves
in the flag’ to defend the company, saying that it was an issue for shareholders to determine. Further
jingoistic feelings were later expressed in the tabloid press when it was revealed that the Royal Bank
of Scotland, which had been part-nationalised at the height of the global financial crisis barely a year
earlier, was part-funding the Kraft bid.

A Performance to Remember

For the heads of M&A at three of London’s leading investment banks, the ten days after Kraft issued
its formal document were among the most hectic of their careers. At any one time, each had around
twenty people working full-time on the Cadbury deal, monitoring every aspect of every rumour, story
or share price move. But the key work which was taking place each day involved just the key
management at Cadbury and the senior advisors. Each morning they met and crafted the document
that would show the world that Cadbury was worth more – much more – than Kraft was proposing to
pay. The evidence prepared by Bonfield was crucial.

Cadbury launched its formal public defence on Monday, 14 December with a presentation in front of
the world’s media at the Goldman Sachs headquarters in London and a defence document which
rejected the Kraft offer. The Goldman Sachs offices on Fleet Street are in a building that was
designed to impress. The art deco frontage had won its previous owner, the Daily Express
newspaper, many awards and since Goldman Sachs had moved in, the building had become much
bigger than anything that could have been imagined even by the press barons of the 1930s.

After signing in at the relatively unassuming main entrance to the right of the original front door,
reporters and analysts walked through the cavernous entrance hall and made their way to a lift which
took them to the main auditorium. This room was big enough to host theatrical productions. On the
stage at the front were two huge TV screens along with a podium and a desk.

At precisely midday, Carr unveiled the title of the presentation, ‘Higher Performance, Higher Value.
Reject Kraft’s Offer.’ A key element of the Cadbury defence was the upgrading of the publicly
available information on Cadbury’s financial performance. Cadbury’s annual report for the financial
year 2008, which had been published in March 2009, set growth targets for the company of 4-6% and
targeted ‘mid-teen’ profit margins by 2011. The company’s first defence document upgraded those
targets substantially. If they voted against the Kraft takeover offer and left the existing board and
management in place, Cadbury could, he said, achieve organic revenue growth of 5-7% per annum.
On this day, Carr and Stitzer were committing the company to achieving margins of 16-18% by 2013,
and increased cash flow meant they were confident in promising double digit percentage increases in
dividends to shareholders from 2010.

Stitzer then took the podium to show the assembled journalists how this was actually possible. As he
worked methodically through the slides, he showed how Cadbury had delivered on its previous
promises. In an accompanying letter to shareholders, Carr wrote that ‘Your Board, which has been so
advised by Goldman Sachs International, Morgan Stanley & Co. Limited and UBS Investment Bank
(‘the Advisers’), believes that Kraft’s offer substantially undervalues Cadbury.’

Nor was this the only occasion during the takeover battle when Cadbury released fresh financial
information to the market. The second defence document, published on Thursday, 14 January,
released previously undisclosed data about Cadbury’s financial performance in financial year 2009. It
told Cadbury shareholders that the existing management team and board had succeeded in achieving
growth in revenues of 5% despite ‘weak economic conditions’ and that it had achieved a profit margin
of 13.5% – 160 basis points more than the 11.9% achieved in 2008 and 25 basis points higher than
the guidance given in Cadbury’s Q3 results of October 2009. A sceptic might have been tempted to
doubt Cadbury’s achievements and upgraded guidance, given that it was released at the height of the

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takeover battle with the objective of defending the company. However, UK takeover rules are strict
enough that investors should be able to trust the information absolutely. The UK Takeover Code can
impose heavy fines on individuals who break this rule or can even ban offenders from working in the
City for life.

Keep Your Friends Close…

The Christmas break didn’t really happen for anyone on the Cadbury team. The Cadbury executives
talked as much to each other as to their families. Each day’s newspapers were scanned for
developments. But the next important development wasn’t until early in the New Year.

The formal offer document required Kraft to issue new shares equal to 23.7% of the Kraft shares
outstanding at the time. As it was more than 20%, under New York Stock Exchange listing rules a
vote among its own shareholders was required.

After a relatively quiet Christmas, the Cadbury takeover was back in the headlines in a big way early
in the New Year. Kraft’s single biggest shareholder at the time was Warren Buffett’s investment fund,
Berkshire Hathaway, which had a 9.4% stake. Buffett had already criticised the takeover in an
interview on the financial news TV network CNBC in September 2009, in which he had described the
initial proposal of a £10.2 billion dollar bid as a ‘pretty full price’. On Tuesday, 5 January, he went
further. Berkshire Hathaway warned that it would vote against the issuing of 370 million new shares
in Kraft to fund the Cadbury takeover, stating ‘Kraft stock, at its current price of $27, is a very
expensive currency to be used in an acquisition.’ This led to speculation in the media that the issuing
of new shares – and thus the entire takeover plan – could be rejected by Kraft shareholders. As Jerry
Bruni, the Chief Executive and portfolio manager of the US investment firm J.V. Bruni & Co, said, ‘If
Buffett votes against something – that carries a great deal of weight with other shareholders.’

Listen to Your Shareholders

Later that same day, Kraft Foods announced that it was changing the terms of its offer. Its news
release stated ‘This morning, Kraft Foods announced a definitive agreement to sell the assets of its
North American pizza business to Nestlé for a total consideration of US$3.7 billion. Following this
news, Kraft Foods is now announcing it will use an amount equivalent to the full net proceeds from
the sale (less taxes and de-leveraging to maintain its investment grade credit rating) to fund a partial
cash alternative (Partial Cash Alternative) as part of its Offer for Cadbury plc. Kraft Foods is doing
this because of the desire expressed by some Cadbury security holders to have a greater proportion
of the Offer in cash and because Kraft Foods Shareholders have expressed a desire for Kraft Foods
to be more sparing in its use of undervalued Kraft Foods Shares as currency for the Offer…
Therefore, it will apply an amount equivalent to the net proceeds from the pizza sale, estimated to be
60 pence per Cadbury Share.’ The ratio would now be reversed. Instead of a 60/40 stock/cash split,
Kraft had changed the offer to pay 40/60 in favour of cash.

The change surprised the analyst community, even after the deal was completed. In the Kraft analyst
conference call on Monday, 18 January, following the Cadbury board’s decision to recommend the
Kraft bid, analyst Sachin Shaw of Capstone Global Markets asked Rosenfeld whether in the
‘shareholder vote that's coming up, [there is] any indication from your shareholders, including
Berkshire Hathaway, on if reducing the stock or share component is going to make it more interesting
for Kraft shareholders to vote this through?’

Rosenfeld’s reply was clearly news to those listening analysts. She responded ‘In the course of this
process we've obviously had the opportunity to hear from shareholders on both sides and there was
pretty much consistency from them that both sides would like to see fewer shares in the transaction
and we have changed the mix consistent with that feedback to reflect those views. As a result of that,
in the new structure we're not required to have a shareholder vote – we're not required by the NYSE
to have a shareholder vote because we'll be issuing less than 20% of our shares outstanding.’

Reckitt agreed. ‘We assumed that Warren Buffett was fully supportive of Kraft’s offer for us. When it
became clear that he was not fully supportive, we were very surprised… They [Kraft] refused to talk to
him, apparently. And then when they changed their final offer so that they no longer needed
shareholder support, we were very, very surprised.’ Cadbury’s legal advisor, Cooke of Slaughter and

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May, was also clear that there was a direct cause and effect between Warren Buffet’s intervention
and the unilateral revision of the offer by Kraft on 5 January, saying ‘It forced them to attempt to
reduce the shares on the table and put more cash into the mix.’

The sale of the Kraft pizza businesses to Nestlé changed the deal landscape in another way
detrimental to Cadbury’s defence: one of the three potential competing bidders dropped out. Nestlé
confirmed that it did not intend to make, or participate in, any formal offers for Cadbury. Only Hershey
and Ferrero remained as potential white knights.

The members of the Hershey Trust, the directors of the company and the independent directors
ultimately could not reach agreement on the basis of an offer in spite of encouragement from Carr and
the Cadbury team. Whilst some members of the Ferrero Board had an appetite for a deal with
Cadbury, the family could not agree on a way forward, either independently or in partnership with
Hershey. The declaration by Nestlé that they were not going to bid for the Company, together with
the difficulties at both Hershey and Ferrero meant that in the final analysis, Kraft was the only bidder
for the company although they did not know that at the time.

The Law of Unintended Consequences

There was yet another significant consequence which resulted from Kraft’s decision to change the
cash/shares ratio. From that moment, it would be unable to complete a takeover on the improved
cash terms without the support and recommendation of the Cadbury board. The reason lies in an
obscure ruling under the UK Takeover Code, which states that while an offerer (in this case, Kraft)
could increase the overall amount of cash on offer to the offeree (that is, Cadbury), it was not allowed
to reduce the number of shares or the offer in any way once it had made the offer formal (which it had
done in early December); therefore, even if it increased the amount of cash in the offer, it would need
to keep its old offer on the table (albeit that it may be unlikely that shareholders would accept the old
offer). Thus Kraft would still require shareholder approval unless the approval of the UK Takeover
Panel could be obtained, which almost certainly would not be forthcoming without the support of
Cadbury.

Cadbury’s own polling of its investor base showed that there was growing support for a deal to be
reached and that the increase in the cash content was welcome. For the Cadbury team therefore,
having seen the cash portion of the offer increase, the mission was to ensure the price appropriately
rewarded shareholders in any deal that was concluded or if value could not be achieved –
independence was preserved.

The Final Push

Day 39 arrived barely a week later, on Tuesday, 12 January. Under the rules of the UK Takeover
Code, it was Cadbury’s final chance to persuade shareholders that they should vote against the Kraft
deal. The centrepiece of the final defence document was a direct letter to shareholders from Carr
containing previously unreleased information about the company’s performance in 2009. Bonfield’s
team had worked miracles with the accountants, and had come up trumps: margins at 13.5% (up 160
basis points on 2008’s performance) and an increase in EBITDA of 16%.

Yet the intent of the investors was now clearer than ever to Cadbury. The advisors named 830p as
the price at which Kraft’s bid would succeed, if shareholders were allowed to vote at that juncture.
They suggested that the job at that point was to get the price up rather than reject the offer.
Cadbury’s Chief Executive, Stitzer, concurred, saying ‘I think when the price went to 830p, I had a
sinking feeling’ and the Chief Financial Officer, Bonfield, believed the tipping point may have even
been slightly lower – saying ‘we could have been at risk even at an 825p bid.’

The Last Chapter

Negotiations for the final deal started at a meeting between Carr and Rosenfeld at London’s
Lanesborough Hotel, on Monday, 18 January, at around midday. The defence team was optimistic,

8
 311-014-1

especially because just days earlier, on Friday, 15 January, there were headlines in the press
screaming ‘Hershey Said to Accelerate Efforts for Cadbury Offer’ (Bloomberg) and ‘Cadbury shares
soar on talk of Hershey bid: Confectioner's stock rises as speculation grows that Hershey will trump
the £10.5bn offer from Kraft’ (The Guardian).

Soon after the meeting started, Rosenfeld offered an improved bid of 830p per share. Based on the
investor research and the collective view of advisors, at 830p the tipping point had been reached and
the majority of shareholders satisfied on both price and cash content. It was then up to Carr and his
Board to negotiate a higher offer. The Board knew that independence was lost and that their
responsibilities now must focus on discharging their shareholder obligations by improving the value
and protecting the rights and prospects of Cadbury employees. Carr told her that her bid was at last
‘in the zone’, but that it was still not sufficient – he would not recommend a bid of less than 850p.
After several hours of negotiation and some breaks from conversation together, a compromise was
reached. By this time, the negotiations had moved to Cadbury’s Berkeley Square offices (with the
final paperwork being typed up around the corner in the offices of Lazard, Kraft’s financial advisor).
Kraft would pay 840p for each Cadbury share, plus a special 10p dividend.

In the interviews that followed the conclusion of the deal, Carr said that this was a deal where head
had overruled heart and duty had won over personal preference. It had been from beginning to end
an exercise in shareholder value.

9





  

 



   
 
   




 

 
  

   
 
  
  

 
 



   


 

10
311-014-1



 
  

 




 
  


     

  
 

 

  
 
 311-014-1


  
  
   
    
  
 
    

 


 
  
  
 
  
   
 


 

 
 

              
 

 
  
   
  
   
    
   
     
   
     
      
  



  
      
    
    
   
 
 
 
 





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          
            
         























 



 












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






















  
  


 
 
 
 


 


 


 
 

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


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
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
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311-014-1









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



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



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

 

 

 

 

 

 



 




 

 



 








 



 


 


 
 

 




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