There was also an interesting (but misguided) issue raised about Buffett’s stance in this deal versus Berkshire’s bid for Burlington – see inside.

Kraft’s management was in a bit of a quandary last month. Because its original offer to buy Cadbury involved issuing stock representing more than 20% of its shares outstanding, the company needed shareholder approval to close the deal as per NYSE’s rule 312.03(c). Warren Buffett, Kraft’s largest shareholder, didn’t like the idea and said that Kraft’s stock was an expensive currency to use at that time. In a very public way, he declared a “no” vote on the issuance and recommended that other shareholders do the same. Given Buffett’s reputation, this was a very credible threat.

To steer away from him, Kraft needed desperately to raise enough cash to be able to cut the share issuance below the 20% threshold, thus avoiding the need for a shareholder vote. That’s where Nestlé came in. Over a weekend the company switched from being a competing bidder for Cadbury, to “helping out” Kraft by acquiring the company’s frozen pizza business. It’s reasonable to suppose that it got a good deal. Not only does it know the ins-and-outs of the food business, but it had the money on hand to act quickly – especially after the sale of Alcon to Novartis. Buffett’s commentary that the pizza sale was badly structured fiscally for Kraft only adds to the impression that the Kraft-Cadbury deal was a “marriage done at gun point”, rushed due to competition or perceived competition for Cadbury, where “minor details” were ignored in view of the bigger objective.

Check out our Q4 2009 report for our take on M&A in the “Merge!” section – this could very well be one example of the “shotgun wedding” we mentioned there.

LINKS:

Does Buffett’s vote on Kraft mean that Berkshire is fully valued? – Bloomberg, Jan. 11th 2010 – If Kraft’s shares are “very expensive currency” and Berkshire is using BRK stock in its bid for Burlington Northern, does it mean that Buffett thinks Berkshire shares are even better valued than Kraft’s? Not necessarily is the obvious answer. Buffett has always said that to pay for an acquisition with shares he must be getting more than what he’s giving away. He is therefore implying that this is happening in his bid for Burlington, while from the press release linked above it’s clear that he thinks that this is not the case in Kraft’s bid for Cadbury. Each deal must be analyzed separately.

LEX on Kraft/ Cadbury – Financial Times, Jan. 19th 2010 – LEX columns are a significant part of the FT.com’s value proposition and we highly recommend ponying up the cash for it. There’s a short video we couldn’t embed here and links to other LEX pieces on the subject.

Buffett’s Lost Vote – NYT’s DealBook blog, Jan. 21st 2010 – For an explanation in layman’s terms of the NYSE rule that would require shareholder approval for Kraft’s original bid for Cadbury.

#2) It doesn’t make sense to think about beer/soft drinks without thinking about FMCG companies – especially food cies.,

#3) It smells like there is a growing convergence of Anheuser Busch-Inbev and PepsiCo that can force at least a SAB Miller/KO approximation (although it seems the first can be much more transformational and faster, independently of terms).

We have just read an interesting report by Credit Suisse that talks tangentially in some of these subjects and more specifically on FEMSA, Modelo and Coke. “Denial Gets Shallow in Mexico” is a must-read for those interested in AmBev and AB-Inbev (here’s a story that mentions it). Also, the report is very “OK, now we get it” about Ambev and Inbev’s superior management.

That said, KO doesn’t seem willing to integrate both beer and soft drinks so the creation of a SAB Miller + Coke + Femsa axis to counterweight ABI + Pepsi + Modelo seems hard to pull off. It also looks like SAB is the only one with real chances and intentions of buying Femsa. Modelo is geared towards integration of beer and CSD (carbonated soft drinks) in Mexico, they have started to distribute Nestle Waters with great success, and they could acquire Pepsi’s bottler in Mexico in the future. Coke doesn’t want to mix the two things – not because it isn’t good economically (in Brazil, Ambev’s share of soft drinks profit is 40% and growing) but because they (Coca-Cola Company) are not aligned with their distributors. Perhaps they don’t want to put their 53% Latin American EBIT margins in jeopardy if bottlers start paying more attention to beer.

It seems Pepsi is much more open-minded about this, starting to mix food and drinks in the US and now buying the bottlers. Pepsi is also very pleased with Ambev’s performance in soft drinks in Brazil and Argentina, so in the future they might envision combining ABI’s beer and their stuff in the same trucks… If ABI buys Modelo it’s highly likely that Pepsi would go along.

Links:

FEMSA in talks over beer deal – Reuters, Oct. 1st ’09

FEMSA weighs future of beer unit – Bloomberg, Oct. 2nd ’09

Mexico now the focus of global beer consolidation – Financial Times, Oct. 3rd ’09 (subscription required and well worth it)

Heineken’s last chance for Latin America – Financial Times, Oct. 25th ’09

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Kraft has not lost its taste for rival – Financial Times, September 30th ’09 – great place to start FT’s in-depth coverage of the Kraft/ Cadbury imbroglio.

A window on Kraft – Wall Street Journal, September 30th ’09 (subscription required and worth it too)