Acquisition by Kraft: What Does the Market Hold for Cadbury?

The historic acquisition of Cadbury International by Kraft Foods Inc. of US has just been concluded. After a five-month siege, Kraft Foods on the 19th of January, 2009 won the highly-publicised battle for Cadbury, turning its hostile approach friendly and securing the support of the UK confectioner’s board in its takeover bid. As the dust settles, industry watchers are asking what this remarkable development holds for the global market and Nigeria in particular. Will it improve global distribution and create stronger market presence in Asia and African markets? Ralph Tathagata and Olaseeni Durojaiye examine the issues and prospects.

Kraft is a worldwide food and beverage company active in more than 150 countries. Cadbury is a worldwide producer and seller of chocolate and sugar confectionery products in over 60 countries.
Kraft launched a hostile bid for the UK chocolate firm in September, 2009, following the rejection of an initial offer of £10.2bn ($16.4bn) or 745 pence per share.
In spite of the hostile bid, however, it was still far from certain that the acquisition was going to be successful as report had it at the time that only 1.5 per cent of Cadbury shareholders supported the bid. It needed the backing of at least 50 per cent in order to go ahead.
On November 9, Kraft submitted another hostile bid for Cadbury on the same terms as the September offer that was rejected. Cadbury chairman, Roger Carr, called the offer “derisory” and recommended that Cadbury shareholders reject Kraft’s bid.
As the bid battle raged on, Cadbury launched a formal defense by presenting a revised business plan to its shareholders, promising to exceed previously stated sales and profit goals through substantial dividend increases starting in 2010. But Kraft said a takeover would deliver substantially more value than Cadbury could achieve on its own. The company even went as far as questioning Cadbury’s ability to achieve annual sales growth of 4% to 6%, arguing such momentum had not been in evidence of Cadbury’s financial record in the past year.

Motivations for the Acquisition
For Kraft and its chairman and chief executive, Irene Rosenfeld, the deal would expand the company’s reach globally and put some of the world’s best-known brands from Kraft’s Oreo cookies and Velveeta cheese to Cadbury’s chocolate bars and Trident gum under the same roof. Rosenfeld believes the acquisition will potentially create worthy rivals for some of their powerful competitors.
Reportedly, Kraft went public with a cash-and-stock bid for the acquisition which reliable sources reveal that Cadbury rebuffed in private. In publicly rejecting it, Cadbury declared that a 31% premium to its closing share price at the time fundamentally undervalued the company. It is on record that during 2009, Cadbury’s chocolate sales grew 7%, gum grew 2% and candy was up 5%. Emerging-market growth outpaced the rest of the globe, up 9%.
George Van Horn, senior analyst at IBISWorld, a UK industry research firm, was quoted in a report as saying, “If you boil down the motivations behind Kraft Foods’ hostile bid for Cadbury, you reach an undeniable fact: People all over the world love candy, gum and chocolate. When someone gets attached to a favourite candy or chewing gum, that loyalty lasts for a long time.” Horn believes that because confectioneries have little store-brand competition and sales stay steady, Candy travels well.
In the same vein, other analysts reason that Kraft craves Cadbury’s profitable brands and access to emerging economies.
Kraft macaroni-and-cheese, they say, may be an American favourite, but won’t necessarily catch on in China or India. They believe candy seems to attract consumers who want to try new things. They equally hold that Cadbury has built a global business with access to the emerging economies that Kraft wants to penetrate. This conviction and probably the initial rejection immediately put pressure on Kraft to increase its bid.
On the other hand, people close to Todd Stitzer, chief executive of Cadbury UK, said the company viewed the bid as an opportunistic effort to take advantage of its depressed valuation. The approach left Cadbury to decide whether to dig in and protect its independence, seek a higher offer from Kraft, or find another bidder that could be friendlier.

Brand/Marketing Rationale
Kraft is optimistic that the strategic and financial rationale for the deal was compelling and will expand the reach and margin potential of the combined business. It also believes that the acquisition will give meaningful revenue synergies and at the same time yield pre-tax cost savings of at least $625 million annually to boost the growth targets of the company. Experts agree that Kraft Foods’ agreement to purchase Cadbury for more than $19 billion is testament to the growth categories major U.S. marketers crave, particularly in developing countries.

Marketing Prospects?
Kraft claims the combined entity will benefit from $675m in annual synergies, improved global distribution and a powerful global presence in multiple retail outlets.
Renowned industry experts also reason that a deal between Kraft and Cadbury would create a global food giant with about $50 billion in annual revenues, and would boost Kraft’s growth prospects by giving it access to new brands, especially in the attractive confectioneries segment. Reports have it that confectionery products typically had higher profit margins than Kraft’s companywide operating margin in 2008, which was about 9%.
It is believed that the deal will add new distribution channels for Kraft’s existing products. Cadbury’s presence in foreign markets has been particularly attractive. The vast majority of Cadbury’s sales are outside the US and more than one-third are in fast-growing emerging markets such as India, China and Africa. However, concerns still linger over the company’s debt levels and the impact this will have on investment.
Shortly before the bid, Standard & Poor, an audit firm, said that Kraft’s credit rating remains on CreditWatch with negative implications, due to the bid. Even Warren Buffet, a Kraft major shareholder and famous value investor, publicly pushed Kraft not to overpay.

Will the Merger Create Intra-Competition?
Both Cadbury and Kraft are multinational companies, with activities in major markets around the world. But Cadbury is the market leader in chocolate confectionery in the UK and Ireland, markets where consumers prefer British-style chocolate over continental tastes and where Kraft has a low market share.
British chocolate often uses vegetable fat instead of all cocoa fat, and tends to be sweeter and milkier than continental chocolate. Cadbury’s Dairy Milk brand is said to be particularly British in its appeal.
Kraft’s major brands in Europe are Milka, Cote d’Or and Toblerone. It is also believed that since these are more in line with continental rather than British tastes, they are not deemed to be in direct competition with Cadbury’s brands in the UK.
The only markets that pose problems are Poland and Romania where both companies have large market shares and their brands compete closely, especially in chocolate tablets. Kraft has therefore said it would sell Cadbury’s Polish business, marketed under the Wedel brand, and Cadbury’s domestic chocolate business in Romania.
The European Commission also said in a report that as long as Cadbury’s concerns in Poland and Romania were sold to a third party, the acquisition would not pose any marketing challenge in those markets.

Challenges
Kraft, which had nearly $20 billion of debt at the end of June, 2009 said it won’t tap markets to raise new funds for the deal, but will rely on cash and debt markets.
At the last bid, Cadbury’s board accepted a bid price of about 840p per share, valuing the business at £11.5bn and Kraft went borrowing about £7bn to finance the deal. The balance was traded in shares.
The need for the global platform Cadbury affords also drove Kraft to sell off its U.S. frozen pizza business to raise funding for its bid. According to reports on Ad Age.com, “a single brand in that portfolio alone – DiGiorno – posted at least 20% growth for the last two quarters, but Kraft sacrificed pizza because it doesn’t have international distribution channels to support frozen products, and the expense of building the proper distribution would have outweighed the rewards.”
However, observers believe that the increase in borrowings to finance the bid was designed to placate Warren Buffet, Kraft’s biggest shareholder. They argue that Kraft’s acquisition of Cadbury will doubtless worry its employees. On the other hand, experts in the UK maintain that Kraft is likely to give a commitment to retain British jobs for some years. They are convinced that there are bound to be job loses especially at Cadbury’s Oxbridge head office.
Cadbury employs just 5,600 staff in the UK and Ireland. There are also growing concerns that there will be a price for Britain to pay for what some see as the surrender of control over her economic destiny. For example, when Kraft is choosing to create jobs or make important investments, it is likely that it will instinctively favour its home country, the US over the UK.

Should Cadbury Nigeria Expect a Boom?
The takeover by Kraft also heightened speculations among Nigerian market analysts penultimate week, linking Cadbury Nigeria’s ranking as the most appreciated stock on the floor of the Nigerian Stock Exchange (NSE) to the recent acquisition. They expressed optimism that Cadbury Nigeria was gradually regaining investors’ confidence as the value of its stock was witnessing small but consistent price growth.
However, Ekanem Kufre, Corporate Affairs Manager, Cadbury Nigeria, holds a contrary view. “It’s too early to comment on the acquisition. Meanwhile, that must be an interesting speculation. But Cadbury Nigeria does not believe in speculation,” he told M2 in a telephone discussion.
Ekanem further disclosed that Cadbury will be holding its board meeting on the 2nd of February, 2010. “Our board meeting is coming up on February 2nd. The outcome of the meeting will determine our public pronouncement and position in the scheme of things. Until then, I can’t say anything for now. We don’t speculate.”
Speaking on the implications of the acquisition to Cadbury Nigeria, industry practitioners believe that changes will occur naturally, although it may take some time.
“I think it is too early to talk of calling for pitch. That will naturally come but it may take some time. The most immediate will be for the new board to meet, complete the takeover, take policy decisions in such areas as corporate strategy, business strategy and marketing strategy. A call for pitch will only come after all of that has been decided,” says Muyiwa Moyela, group head, Client Services, The Quadrant Company.
He also cited that this was the order in which things played out when Gulf-Chevron acquired Texaco and became Chevron-Texaco. Years later, it dropped the Texaco name to become Chevron. On the global level, Kraft has declined to speculate on what marketing or advertising strategy the combined company would adopt.

Should Nigerian Consumers Expect New Offerings?
As stated earlier, the acquisition may be premised on the fact that Cadbury International controls a brand portfolio which houses brands that command good brand visibility, awareness and market share in their various categories. This translates to a good bottom-line for stakeholders no doubt.
But the same cannot be said of the brands in the Cadbury Nigeria stable.
Presently, Cadbury Nigeria merely boasts of three brands in its products portfolio: Bournvita, Tom Tom and Butter Mint.
Also, while many Cadbury brands in other countries are well established and have sub-brands, this is not true for Cadbury Nigeria brands. Tom Tom sub-brands; Tom Tom Extra and Tom Tom Honey Lemon, which are the only sub brands of the product, are said to be hanging at the fringes of the Nigerian candy market.
For the acquisition to be worth the ‘deal’ Cadbury Nigeria may be forced to either acquire thriving local brands or introduce other brands from the international Cadbury or Kraft stables to the Nigerian market. The odds, however, will favour buying performing brands. This is because it is believed that Kraft favours buying performing brands over developing products already in its production line. Interbrand argues that this suggests a lack of confidence in internal innovations to deliver growth objectives.
While the distinctiveness of Cadbury’s products may present an opportunity for Kraft to bring new consumers on board through a wider distribution network, experts say that careful attention must be given to portfolio management as it is crucial in the quest to position both brands to complement each other rather than compete against themselves.
Still, another challenge will be to determine suitable local brands that will be bought into the Cadbury portfolio to avoid intra-brand competition.