Wednesday, August 08, 2012

Of Irene, ego, Altria, and Todd the God‘d’!

Kraft CEO Irene Rosenfield’s overeager bid for Cadbury has done more for Cadbury’s shareholders than its CEO Todd Stitzer could ever achieve in his tenure. A tale about how Todd pulled it off, by B&E’s Vareen Ray

Todd perhaps would be ready to part with half his separation package for Irene by now, given the fact that without her belligerent egoistic effort that doesn’t seem to be settling down, Cadbury’s (previously called Cadbury Schweppes since 1969, till the demerger last year) stock price volume trades wouldn’t ever have hit the highs seen in the past few days. Eat this dope: Historically, Cadbury’s stock prices had languished at the under $20 level for ages – it’s a Brit company, you know. The year 2003 was perhaps the crossover year, when stock prices suddenly starting going up by almost 50% and even crossed $30 many times. And why? Financial performance aside, Todd (and his histrionics; check the photo on the right) became Cadbury’s CEO – or CEOs, if you’re English! Todd very well knew that if shareholders were his most important aim, then it’d take more than simple financial results to improve the share price. If 2006 saw the $40 mark being broken, 2007 even saw the $50 mark being broken. Todd had become the new Godd (with an extra ‘d’, please). Todd pulled it off with ease despite the fact that Cadbury’s net income had fallen dramatically from $2 billion in 2006 to $812 million in 2007. How in heavens did the CEO of a truly-upnosed Brit company manage this? Well, Todd is a thoroughbred American, straight out of Walker Texas Ranger (primetime on NBC east coast; don’t bother if you’ve not watched it) who puts a dairy premium on showacting and shooting from the hip. And then came his debacle, when in a bid to outsmart the market, he demerged Schweppes in 2008, hoping the stock price would rise further. Net income fell to $529 million by end 2008; by 2009, stocks collapsed to the $30 levels and below that too! Todd had tried everything in and out of the book; but was failing to get the price back, till Dame Irene plopped out of the sky. That Kraft CEO Irene Rosenfeld is headstrong is not doubted – Kraft belongs to the stable of the Altria group, the world’s largest cigarette manufacturer – but that she would get her Adam’s apple hooked onto this deal was unexpected! Well, her ego basket must have been overflowing – since she was ranked sixth on Forbes’ list of most powerful women, 2009 – for her to have taken the hardball move on September 8, 2009, to acquire Cadbury Plc for $16.7 billion, a clearly high premium of 30%.

The move would have seemed to be undertaken totally in cahoots with Todd, had it not been for the evident hatred the companies have for each other – Kraft is American. Irene claims that post the merger, the entity will be catapulted to the number one position in the global confectionery market, creating a $51 billion package-food and confectionery company, bigger than that of current leader Mars (“It [Cadbury] is a perfect fit with our long-term strategic priorities,” she says). A Kraft veteran, Irene has spent a quarter of a century with the Illinois-based company, briefly moving to PepsiCo in 2004 to run its Frito-Lay snack unit. She returned back to Kraft in June 2006 as its CEO and bought out Danone’s cookie business for $7.2 billion and made Kraft the world’s largest biscuit maker, which is where the current irrational exuberance emanates from. Kraft claims with 14.9% of combined market share, the nearest competitor Mars would be left ‘far’ behind (one wonders about that, given Mars has a global market share of 14.5%; not that ‘far behind’!). Irene refuses to acknowledge that Kraft would have to pile up $6.8 billion in debt to finance the cash portion of the deal, if it goes through. The company already has about $3 billion in net debt. Also, Cadbury’s global confectionery share has in the past increased pithily (for example, from 10.2% in 2007 to 10.3% in 2008). They do account for almost 30% of the global gum market though. Over the last couple of years, the average takeover multiple for similar food deals has been 15 x EBITDA, which in this case would require a bid value per Cadbury share of $85 considering the 2008 EBITDA, clearly too high.

So why does Todd in all probability consider Irene his most important benefactor? Till September 4, Cadbury share prices were twittering around $37. Since September 8, stock price has screamed up to beyond $52! (Kraft’s price tanked to $26 on that day, down from above $30 a few days back). And how does Todd respond to such a brilliant offer by Irene? He dismisses it [“Kraft’s bid fundamentally undervalues the group and its prospects”], and plays the game exactly according to how it should be played, as he knows that given her BA in Arts in Psychology from Cornell, the ego state in Irene just won’t give up. It seems the markets too realised that. Trading volumes of Cadbury, which just last month were a shabby 100-300,000 went insane this past week post Todd’s refusal touching almost 10 million.




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