Yesterday, Kraft Foods (KFT) of the U.S. increased its bid for the UK confectioner Cadbury (CBRY) to £5 per share in cash and 0.1874 Kraft shares for each Cadbury share (up from its previous offer of £3 per share in cash and 0.2589 Kraft share for each Cadbury share). The deal values Cadbury at a 13 times 2009 earnings. Last night Warren Buffett, a major shareholder in Kraft, said that the company had over paid for the acquisition to proceed with the share price having almost doubled since the bid (closing yesterday at £8.34) was announced and valued the company at £11.5 billion.
The combined firm will overtake Mars/Wrigley to operate as the leading player in the global confectionery market but with margins under pressure as the price of raw materials continues to rise, U.K. workers union fears that that Kraft may take an axe to the Cadbury organisation to aggressively cut costs may be the key driver to deliver a return on this investment.
With Buffett, expressing his reservations about the deal, Kraft management have a lot to prove. As the history of these type of high premium takeovers shows, shareholders are often disappointed. Let’s see if Kraft management follow the trend.