Chocolate moves down the production line at the Cadbury factory in Birmingham, England
Getting sweet tooths to give in to temptation has never been too difficult for Cadbury, the world's second largest confectioner. However, resistance, as it's now finding, is hard to maintain. Ending months of hostility, the firm announced on Tuesday, Jan. 19, it had approved a revised takeover bid from U.S. food giant Kraft. Linking Cadbury's Dairy Milk chocolate to Kraft's Philadelphia cream cheese in a $19.5 billion deal, Cadbury chairman Roger Carr said cheerfully in a statement, amounted to "good value for Cadbury shareholders."
This comes just months after Carr dismissed an initial $16.3 billion approach from Kraft as "derisory." But when Kraft sweetened the terms of a deal — by raising the amount of cash it was offering alongside its own shares — it proved too difficult for Cadbury to resist. At $13.91 per Cadbury share, a 7% premium over Friday's closing price, the new deal is expected to win shareholders' backing before the deadline for approval expires in two weeks. Buoyed by that prospect, shares in Cadbury rose more than 3% in trading on Monday, to $13.70.
For Kraft too, persistence should pay dividends. While the Illinois-based firm has looked sickly in recent quarters, Cadbury has shone. The British business boasts "dominant positions, strong emerging market exposure and the potential for massive margin improvements," Andrew Wood, an analyst with the financial firm Sanford C. Bernstein, wrote in a note to clients on Tuesday. "Kraft," he added, "will benefit from all of Cadbury's strengths." And at a knockdown price. Bagging the firm for a value equivalent to 13 times Cadbury's profit before tax and other deductions amounts to the cheapest food-industry takeover in more than a decade, Wood notes.
Establishing a rival to Mars as the world's largest confectioner does not come without challenges, though. Having borrowed heavily to buy Cadbury, Kraft will be under pressure to cut costs and raise margins at the British company. To some, that spells job cuts. The British trade union Unite claimed earlier this month that some 7,000 Cadbury workers would be under threat if the proposed takeover went through. Another analyst, Howard Wheeldon, a senior strategist at BGC Partners, questioned on Tuesday whether the acquisition would herald "a partial breakup" of the British business.
Absent any explicit assurances on job security, Kraft chief executive Irene Rosenfeld pledged "great respect for Cadbury's brands, heritage and people" in a statement announcing the deal. Keeping those things in mind may be more important than in most takeovers. Founded 186 years ago when John Cadbury, a Quaker, began selling tea, coffee and hot chocolate out of a store in central England, his eponymous firm enjoys an enduring popularity that distinguishes it from, say, Britain's steel manufacturers or electricity companies. Earlier this month, not far from the site of that original store in Birmingham, fans of Cadbury took part in a mass chocolate-eating event to protest Kraft's interest in the firm. Some sang its most popular jingles.
It may be vital for Kraft to be viewed as respectful of Cadbury's British values — especially in the U.K., the world's second largest candy market. But it needn't be unprofitable. Take the Mini, for instance. German automaker BMW, which started producing the cars in 2001 after the collapse of British manufacturer Rover Group, has reaped rich rewards by "playing up the Britishness and keeping a link to the heritage" of its spruced-up new models, says David Bailey, a professor of international business strategy and economics at Coventry University. Ford, on the other hand, fell afoul as the former owner of Jaguar by trying to take Britain's luxury sports-car brand into the mass market. Overseas buyers must "be aware of sensitivities of the brand and preserve it to sell the product successfully," Bailey says. "That's a key lesson for Kraft."
Resisting, in this case, may be costly.