Cadbury Takeover Has a Bittersweet Ending

By Chris Hughes

September 10, 2019, 12:00 AM EDT

Medium-range headshots of Roger Carr of Cadbury and Irene Rosenfeld of Kraft against a background of a Cadbury chocolate bar

Ten years ago, Kraft Foods Inc. launched a bitter battle to buy Britain’s Cadbury Plc. The acquisition of the maker of Dairy Milk chocolate sparked a controversy about hostile foreign bidders and led to an overhaul of the U.K.’s takeover rules. For the confectioner’s former shareholders, the outcome has been bittersweet — and in the current climate, that matters.

Irene Rosenfeld, Kraft’s then CEO, went public with her ambitions on Sept. 7, 2009. Following a long fight, Cadbury Chairman Roger Carr agreed to a deal in January after extracting a last-minute sweetener. When the transaction closed in March 2010, Cadbury shares had returned 55%, including dividends, since the battle commenced. Adjust for the FTSE-100’s big gain over the same period and the real premium was somewhat lower.

The question is what happened next. Cadbury shareholders who reinvested their windfall in the enlarged company should be feeling sated. In 2012, Kraft spun off its grocery business into Kraft Foods Group, which was later bought by Heinz to become Kraft Heinz Co. Cadbury stayed in the remaining business, renamed Mondelez International Inc. Kraft Heinz flopped as Mondelez flourished.

Imagine a former Cadbury shareholder who had 10,000 pounds ($12,396) of stock before Kraft popped up. Suppose this investor put all their proceeds from the takeover into the bidder’s stock and reinvested dividends. Assume also they bought more Kraft Heinz shares with the cash paid by Heinz, and reinvested dividends there too. Ten years later, that investor would be sitting on Mondelez and Kraft Heinz shares worth about 55,000 pounds, a total return of about 450%.

Ok, weak sterling helps the conversion back into pounds. All the same, the gains could have been higher still. Cadbury cautioned that Kraft was a low-growth conglomerate with a history of disappointment. So a true Curly Wurly devotee would therefore have sold the Kraft grocery shares created in the demerger and promptly invested the proceeds in Mondelez (now effectively Cadbury). That way, they would have dodged the Kraft Heinz pain and be sitting on roughly 70,000 pounds, a total return of some 600%.

What’s not to like? Unfortunately, many investment funds that held Cadbury stock probably weren’t allowed to hold U.S. shares — their mandate is to invest in London-listed companies. They would have had to redeploy the 12 billion pounds of proceeds from the bid closer to home.

Reinvesting in the FTSE-100 or the FTSE-350 Food Producers index would have been a terrible disappointment. Picking Unilever Plc shares would have generated a total return of about 470%, a worse outcome than staying with Mondelez and ditching Kraft in the spin-off.

Source: Bloomberg
Note: Returns are stated in U.K. pounds.
*Gains on Cadbury share purchased day before Kraft bid in September 2009.

Some of these counterfactuals face a practical problem: It’s hard for a sector index, let alone an individual stock, to absorb such a vast payout from a takeover: Unilever’s U.K.-listed shares were worth only 26 billion pounds at the time.

Might Cadbury shareholders have been better off rejecting the takeover? Use the returns of the FTSE-100 during the bid battle and the subsequent performance of Mondelez as a proxy for how an independent Cadbury might have done. The implied total return is around 430% when expressed in pounds — and Cadbury would still have the chance of extracting a premium from a full or partial sale. Less than one-third of U.K. blue-chips have fared that well.

Recent U.K. M&A activity has been dominated by cash bids from private equity firms and overseas buyers. The critical question for many shareholders is: If I sell this company, can I replace it with a stock that has similar long-term prospects? The answer is often no, especially for funds with restrictive mandates. A fat takeover premium really is necessary if selling out is to be worth it.

Cadbury Takeover Has a Bittersweet Ending

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