On February 2, 2010 Kraft and Cadbury, two leading firms in the snack industry finalized their merger decision after five months of negotiation. In this report we will examine why it made strategic sense for the two companies to combine and evaluate the performance of the combined companies since its merger. In particular we will analyze the post-merger financial statements and highlight a few points regarding the accounting.
INTRODUCTION OF KRAFT AND CADBURY
Kraft Foods Inc. (KFT) is the world’s largest food processing company with revenues of $40 billion (fiscal year 2009) which sells its products in more than 150 countries. We are familiar with many of its global brands – Oreo, Philadelphia Cream Cheese, Trident, Nabisco, Maxwell House and others. Its products are biscuits, confectionary, cheese, convenient meals and packaged groceries. About half of the revenues are from international markets. Kraft Foods is an attractive investment in which Warren Buffett has a 9.4% stake. It is a truly global brand with 100,000 employees and a large market capitalization of $53 billion (Yahoo finance, Feb 13, 2011). In 2008, it replaced AIG as part of the Dow Jones Industrial Average.
Cadbury plc is a British confectionary company which is now a wholly owned subsidiary of Kraft. It moved up its rank as second to largest player in the industry after the merger. Cadbury is substantially smaller than Kraft; about a fifth the size of Kraft. Yet, while still a public company and listed in the FTSE 100, Cadbury already operated in 60 countries and hired 45,000 employees. Its revenues in 2008 were £5.4 billion with 46% from chocolate, 33% from gum, and 21% from candy products. Cadbury was an attractive takeover target due to its high growth potential and market experience in emerging countries.
REASONS FOR THE MERGER
Strategically and financially, a merger between the two multi-national companies with similar target markets and products seemed like a perfect match. The largest revenue synergies would come from expansion of Kraft brands into emerging and European markets where Cradbury has a footprint. Cradbury has a strong presence in India, Mexico and South Africa whereas Kraft is dominant in China, Russia, and Brazil. The combined company’s distribution channels will reach more consumers with more product options and boost sales. For the conglomerate cash cow Kraft, a high growth engine like Cradbury is essential. Cost savings were expected by reducing redundant workforce and streamlining marketing expenses. CEO and Chairman of Kraft Irene Rosenfeld stated that $675 million of cost savings can be achieved in 3 years. Together, the combined firms would be the world’s largest chocolate maker and world’s second largest gum maker.
In the end, the deal closed successfully because both company’s shareholders found the merger a greater benefit than the status quo. Cadbury, whose many shareholders are hedge funds, were aggressive in settling for the highest possible bid. On the other side, Rosenfeld conveniently reported, "At the end of the day, we would pay what we thought this outfit was worth…I believe paying 13 times EBITDA for an asset of this quality is a very good price.” Along the same lines, Andrew Wood, analyst at Sanford C. Bernstein remarked, "Kraft has acquired a great asset at a great price and should be given credit for this. We consider that this is a bargain -- the lowest multiple of any major M&A deal in the global food space in well over a decade."
ALLOCATION OF FAIR VALUE TO IDENTIFIABLE ASSETS AND GOODWILL
1) The consideration given
- Cadbury acquisition was valued at $18,547 million
2) The amount that was allocated to FV of identifiable assets (in millions) Receivables
Other current assets
Property, plant and equipment
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