7.5p, or 1 per cent.
That’s the gap between the Cadbury share price and the value of Kraft’s £10.4bn bid on Wednesday morning.
Which will no doubt please those conspiracy theorists (both in the media and the stockmarket) who believe Warren Buffett is in league with Kraft’s management to secure Cadbury at a knockdown price.
Here’s Daily Telegraph’s Damien Recce explaining the theory:
As befitting the Sage of Omaha, Berkshire Hathaway’s statement is canny indeed. First, it uses tough language in voting against Kraft’s proposal to issue 370m shares to facilitate the Cadbury bid. To vote yes, it argues, would be to give Kraft management a blank cheque in a bid process where they can still change the terms.
This is undoubtedly true and gives the impression that Kraft’s biggest shareholder is queasy about the deal, helping Kraft’s shares go up on the view that its chances of winning Cadbury have diminished while Cadbury’s shares go down as expectations of a bid premium also falter. But this is exactly what Rosenfeld wants over the next few weeks, and it’s what Buffett wants too. The value of Kraft’s currency goes up [they closed 4.9% higher on Tuesday night] while Cadbury’s falls, helping the Kraft board structure a deal that eventually minimises the use of shares and maximises cash.
Buffett’s and Rosenfeld’s interests are entirely aligned – he is, after all, the company’s biggest shareholder and he’s never questioned the industrial logic of the Cadbury approach.
And the Guardian’s Nils Pratley:
In effect, he warned Rosenfeld not to overpay and to confine any increase in the terms to cash. But he aired that opinion on US television several weeks ago. So there was little new in the statement apart from its impressive sense of theatre.
That, one assumes, was the point – it was an attempt to boost Kraft’s flagging share price and to dampen the expectations of Cadbury’s investors. The timing was perfect since Nestlé declared itself a non-runner in the race for Cadbury. The net result was that Cadbury’s closed down 3% at 779p, which is not much above Kraft’s offer, now worth 757p – the gap is as narrow as it has been at any point during this scrap. So, bravo, Mr Buffett, investors are still fascinated by your every word.
However, we find ourselves siding with PestoWire, which says the game is up and Cadbury will remain independent:
So Kraft now has till January 19 to persuade Berkshire that its price for Cadbury represents very good value and to persuade Cadbury shareholders that they are getting a fabulous price.
Those two ambitions don’t look altogether consistent. In other words, there must be a pretty good chance that Cadbury – against prevailing opinion – will remain independent.
Would “friends” of Kraft’s board point out – as Berkshire has done – that this company spent $3.6bn on its own stock at $33 per share in 2007, presumably on the basis that $33 was too cheap for the stock, and now wants to issue shares when they are even cheaper.
These are the observations of a shareholder who doesn’t appear to have huge respect for the judgement of management. It is therefore reasonable to assume that Berkshire really doesn’t like the look of the Cadbury takeover.
That said, I am not sure the penny has dropped in the market place, because if it had surely Cadbury’s share price would have fallen by more than today’s 3 per cent.
And also David Wighton at the Times, who is surprised that some hedge funds still think Kraft will bump its offer, currently worth 764p a share:
Until now, I had assumed that Warren Buffett’s public warnings that Kraft must not overpay for Cadbury were a clever bit of shadow boxing designed to talk down the target’s share price. After yesterday’s remarkable intervention, it is pretty clear that Mr Buffett is serious.
His statement comes across as an extraordinary dressing-down of Irene Rosenfeld and the rest of the Kraft board by the world’s most admired investor.
It must surely reduce the chances of Kraft coming up with a knock-out increase in its terms. Mr Buffett has made plain that he is unhappy with the current offer, given the weakness of Kraft’s share price, let alone one including more stock.
Cadbury’s biggest British shareholders are insistent that they will not accept anything close to the current offer. Many now appear to have been convinced that the share price would fall only about 10 per cent if Kraft walked away. They view that as a reasonable price to pay for refusing to sell out on the cheap. Of course, they may be playing games too.
As Pesto says the penny has not dropped but surely it can’t be much longer before Cadbury is trading at a discount to the terms of the Kraft offer:
Update:
One of the few analysts who is not restricted and can still follow Cadbury is Martin Deboo of Investec Securities. In spite of Warren Buffett’s intervention he is not unfurling the Union Jack bunting yet. Deboo believes Kraft can still snare its quarry.
Here’s his thinking.
So what we think Berkshire is really saying to Kraft is something along the lines of: ‘Look, we are not against this deal in principle but we are unhappy bankrolling it with our equity. If you (Kraft) really have the courage of your convictions in the synergies available and the cashflow stream that will result, then surely you should be comfortable with a more aggressive component of debt financing. We are therefore going to test your conviction by withholding our approval until we see a more sensibly financed proposal.
We continue to think that Kraft can afford a bid of up to 820p aggregate value, of which (pace the Pizzas disposal) well north of £4 could be in cash, consistent with maintenance of an investment grade rating.
Related links:
Buffett wades into battle for Cadbury - FT
Kraft’s strategy – Lex
Cadbury gets creamed by Buffett… – FT Alphaville