The Cross-border Merger of Kraft and Cadbury - Term Paper Example

? The Cross-border Merger of Kraft and Cadbury An overview of the Kraft –Cadbury merger In February Cadbury gave in to Kraft’s US$ 19.7 billion takeover after a fierce battle lasting over 100 days. Kraft Foods US is a major confectionary maker. The British chocolate maker had earlier in 2009, rejected a US$ 16.4 billion hostile takeover bid from Kraft, stating that the value did not represent the intrinsic value of the Cadbury brand. Industry experts believe that the combined group is the number one in chocolate and confectionary segments, as well as the second in the high growth gum segment (Ralph & Olesseni, p.61). Cadbury had agreed for 840 pence per share which would give them a total valuation of $19 billion. Media reported that Cadbury slipped into US giant Kraft Foods and the British Prime Minister committed that the jobs in UK could be protected. It was estimated that Cadbury employees numbered more than 45000 worldwide. It was expected, Kraft Cadbury combined would generate large cost savings, enabling Kraft to become a global market leader. The conglomeration would also generate annual sales of more than $ 50 billion. The market reaction was mixed especially from UK where the fear of job loss came up and cultural reaction was that the country’s honor namely Cadbury’s brand, had been given to US. Kraft Foods was one of the major US confectionery manufacturers with net revenue of $42 billion and operating in 150 countries as of 2008. It was founded 1903 as a cheese company by James L. Kraft (Funding Universe, 2002) and over the years established fine brands like Milka, Toblerone, Jacobs, Oscar Mayer and Oreo. Even though Kraft was able to capture US and European markets, it was the second largest food company in the world and Nestle, Switzerland continued to occupy the premier position with its brands firmly established not only in developed countries but also in developing countries. Nestle had reported a net profit of $9.55 billion with an annual turnover of $99 billion in 2009. Next in the race for second position was Cadbury, UK with its popular brands like Dairy Milk bars, Roses chocolates, Trident gum and Halls cough drops, built over 150 years not only in UK and developed countries but also firmly established its presence in the developing countries like India, Mexico and Brazil for over 50 years. Cadbury’s revenues in 2008 stood at ?5.4billion. Kraft Foods US with an ambition to reach the top slot in the global confectionery market made a bid for $10 billion to acquire a 100% stake in Cadbury at the end of 2009. The bid was rejected outright as the market value of the share was more than ? 7 per share and Kraft Foods had to reconsider the valuation process of Cadbury and made a revised offer of around $ 19.6 billion in early 2010 over which the shareholders of Cadbury numbering over 90% consented to the acquisition. Evolution and Growth of Kraft Foods Kraft Foods Inc., the second largest food company in the world, had brands spread over five consumer sectors – snacks, beverages, cheese, grocery and convenient meals. Kraft Foods had strong presence worldwide and operated in150 countries as of 2008. The company had evolved from a cheese company, started by James L. Kraft in 1903. James L. Kraft had started his cheese business to relieve the grocers from travelling daily to procure cheese. The merger of Kraft – Phenix and National Dairy Products Corporation in 1930 led to the further growth of Kraft. New brands such as Miracle Whip salad dressing, Velveeta pasteurized process cheese spread, were launched and turned to be successful. Innovative advertising strategy followed by Kraft was another driving force for Kraft’s success. The company was renamed as Kraft Foods Company in 1945 and during the post war period Kraft Foods continued with its new product launches and innovative advertising. In spite of various restructuring activities, Kraft General Foods’ financial results were not rosy. In early 1995, the three units, Kraft USA, General Foods USA and Kraft General Foods Canada were merged into one organization under the name ‘Kraft Foods, Inc.’ and Kraft General Foods International was renamed as Kraft Foods International. The company disposed off its bakery division in 1995. A successful product launch in the late 90s was DiGiorno Rising Crust pizza. The company started reviving during the late 90s and it had acquired the license for the Taco Bell line of Mexican grocery products. It further entered into an agreement with Starbucks to market and distribute their whole bean and ground coffee. In early 2000, Philip Morris acquired Nabisco Group Holding Corp, integrated their operations with Kraft Foods, Inc. and renamed it as Kraft Foods Inc. In July 2007 Kraft Foods acquired global business of Group Dannone which included leading biscuit brands such as Lefevre Utile (LU), TUC and Prince. Post-acquisition Kraft became the world’s leading biscuit company and strengthened its business growth and expansion. In November 2007, Kraft Foods sold off its Post cereal business to Ralcorp Holdings Inc., a major private label maker of cereals and frozen foods, for a consideration $2.6billon. Kraft Foods had focused upon its plan to attain a long term and sustainable growth since 2007. As planned earlier it worked on three metrics and augmented its operating income margin and organic revenue growth (shown below). In addition, Kraft Foods was able to improve its brand equity, deliver high quality earnings growth, generate strong free cash flow, progress in all its operations worldwide, and improve its margins despite reinvesting for future growth. Kraft Foods Growth (2006- 2009) Source: Kraft Foods Financial Statements Kraft Foods’ Acquisition of Cadbury: Challenges and Opportunities The key motivating factor for Kraft Foods acquisition of Cadbury was to expand Kraft’s global presence and tap the emerging markets. This acquisition would also lead to integrate world’s famous brands such as Kraft’s Oreo cookies, Velveeta cheese and Cadbury’s chocolate bars under one roof. The acquisition was expected to help both the companies to compete effectively against the rivals. “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.” By acquiring Cadbury, Kraft would get a solid presence in the fast growing economies where large sections of the populations have turned towards processed foods including rural population. To offer products at competitive price, Kraft would tie up with local manufacturers and sell them under the Kraft’s brand. “Analysts had long supported Kraft’s rationale for the merger, which would add Trident gum and Dairy Milk chocolates to Kraft’s brands and help the American food company expand into faster-growing countries like India, South Africa and Mexico.” Valuation Process The table below shows how Krafts Discounted Future Cash flows will look like. The current financial results inclusive of the merger have been analyzed and decomposed (Eitman, Stonehill & Moffet, 2006, p. 98). Though Kraft – Cadbury combined would improve Kraft’s position in the chocolate market, the competition from Nestle, the global No.1 food company, would continue and Nestle would dominate the food and beverages market. Nestle’s brands included Nescafe, Perrier, Jenny Craig and Haagen Dazs had net sales of $99billion in 2009 (Michelle, 2007, p.65). The earnings per share stood at $2.68. Nestle products could be categorized into Food and Beverages and Pharmaceuticals. Food and Beverages included Powdered and Liquid beverages, Water, Milk Products, Ice Cream, Cooking Aids, Confectionery and Pet Care products. In 2009, Nestle had achieved above target and expected a higher return in 2010. Analysts had forecasted that Nestle growth would be around 4.6% in 2010. The Company is well positioned especially in the emerging markets as soon as economic growth accelerates again." Though Nestle ranked high in the food market, Kraft – Cadbury deal had impacted on the global player. Post Kraft – Cadbury acquisition Nestle was expected to become No.3 in the chocolate world. To retain its leading position Nestle had plans to acquire Hershey. A follow up after the merger After the hostile takeover of Cadbury, a lot of changes happened. Cadbury was covering emerging markets in India and Africa while Kraft Foods had a broad consumer base in North America and the South America (Kraft Foods- Cagny Conference). Kraft Foods has seen an increase in market share in developing economies from 20% Pre-Cadbury acquisition to 26% post acquisition. The Kraft Foods – Cadbury acquisition process had started from August 2009. Before the final acceptance of Cadbury, Kraft Foods had repeatedly approached the UK chocolate firm both formally and informally. The initial offers were rejected and Kraft Foods was pressurized to increase their offer value. Moreover, Cadbury’s performance was high which had made the acquisition process tougher for Kraft Foods. In early 2010, the world’s largest food company Nestle had acquired the pizza business of its rival Kraft Foods for $3.7 billion. The funds from this deal had helped Kraft Foods to increase the offer of Cadbury and thereby acquired the company. The financial ratios below reflect the merger of Kraft and Cadbury. The two merged in February 2010. This can thus, be reflected in the results of September, 2011, about a year later. Improvements in terms of Price/ Earnings from 11.71 in 2009 to 16.64 after the merger. The Cadbury deal has turned Kraft Foods to a global powerhouse with net revenues of about $48 billion. New distribution channels for the Kraft products have also been created. Access to emerging markets was another attracting factor. Source: Kraft Foods-Cagny Conference References Eiteman, D.K., Stonehill, A.I. & Moffett, M.H. (2006). Cross-border mergers, acquisitions and valuations. Multinational Business Finance Location: Addison Wesley. [Retrieved] 12 December 2011, [from] http://wps.aw.com/wps/media/objects/5315/5443332/Chapter_WEB.pdf Eiteman, D.K., Stonehill, A.I. & Moffett, M.H. (2006). Multinational Business Finance. New York: Addison Wesley. India Knowledge @ Wharton (2010). Sweet surrender: Can Kraft’s Cadbury acquisition help it tap the Indian market? Retrieved December 7, 2011 from India Knowledge @ Wharton Website: http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4451 Kraft Foods Inc. – Company history. (n.d.). Retrieved December 6, 2011 from Funding Universe Website: http://www.fundinguniverse.com/company-histories/Kraft-Foods-Inc Company-History.html Kraft Foods – Cagny Conference”, Retrieved December 7, 2011 from http://phx.corporateir.net/External.File?item=UGFyZW50SUQ9MzE3ODR8Q2hpbGR RD0tMXxUeXBlPTM=&t= Ralph, T & Olesseni D. (n.d.). Acquisition by Kraft: What doest the market hold for Cadbury? Retrieved December 6, 2011 from M2 Online website:http://m2weekly.com/cover cover/acquisition-by-kraft-what-does-the-market-hold-for-cadbury/ Michelle G. (2007). “Kraft Completes Acquisition of Groupe Danone's Global Biscuit Business”, Retrieved December 7, 2011 from website http://www.flex-news food.com/pages/12745/Danone/Kraft/kraft-completes-acquisition-groupe-danones global biscuit-business.html Read More