Welcome to The Business Buying Academy with Sieva Kozinsky.

🔑 How Kraft pulled off a sweet acquisition

In the 2000s the packaged-food industry entered a consolidation wave.

Growth in mature grocery categories in North America slowed.

Private-label competition was rising.

And commodity costs were volatile.

The food giants needed new ways to expand after exhausting all organic growth for their existing brands.

So they started acquiring competitors, consolidating the industry into a few huge players.

One of the categories that still looked attractive were snacks and candies.

There where strong, emerging brands looking to be acquired.

Plus the category had higher margins and more exposure to emerging markets.

Food giant Kraft, under CEO Irene Rosenfeld, would make one of the largest food acquisitions ever against this backdrop.

Making a Food Giant

Before we dive into Kraft's acquisition of a European candy giant, let's start from the beginning.

Kraft’s own history already showed how a food empire could be built through a web of acquisitions.

James L. Kraft started with a wholesale cheese business in Chicago in the early 1900s. But his processed cheese products and later Philadelphia cream cheese made the brand famous.

In 1985 the tobacco giant Philip Morris bought General Foods (Maxwell House, Jell-O, Oscar Mayer and others).

Three years later it bought Kraft itself for roughly $13 billion and folded the two into Kraft General Foods.

In 2000 Philip Morris added Nabisco (Oreo, Ritz, Planters) after the long aftermath of the 1980s RJR Nabisco saga, briefly creating one of the largest food companies in the world. Philip Morris (later Altria) then began spinning the food business out; by 2007 Kraft was fully independent again, with Rosenfeld, a longtime General Foods and Philip Morris executive, as CEO.

The Deal

In 2010, Kraft acquired candy maker Cadbury for £11.9 billion ($19.5 billion at the time).

It was the largest European food and beverage deal on record at the time.

Founded in 1824 by a family in Birmingham, England, Cadbury spent generations building a reputation around Dairy Milk and Creme Eggs.

By 2009 it was a focused candy maker after selling its drinks business.

But being acquired by an American business seemed unlikely; the business was widely seen in Britain as a national institution rather than just another public company.

And when Kraft first approached Cadbury about an acquisition in 2009, Cadbury’s board rejected the first offer outright, calling absorption into Kraft’s “low-growth conglomerate” an unappealing prospect.

But then Kraft formalized a hostile bid; Cadbury argued the price undervalued its emerging-market growth and brand.

Warren Buffett, whose Berkshire Hathaway owned 9.4% of Kraft, publicly warned Kraft not to overpay, especially with Kraft stock.

Hershey and Ferrero each said they were reviewing the situation, but neither launched a competing offer.

To raise cash and remove Nestlé as a potential rival bidder, Kraft sold its North American frozen-pizza business (DiGiorno, Tombstone and others) to Nestlé for $3.7 billion in January 2010.

Rosenfeld raised the offer by about 13% from where they started.

After long nights of negotiations at Cadbury’s offices the the two sides agreed to the $19.5 merger.

Kraft increased the cash portion of the deal and cut the number of new shares it would issue, a structure that also let it avoid a Kraft shareholder vote.

Buffett said he would vote against the earlier share-heavy plan.

But now he could not stop it as management avoided a shareholder vote.

"Warren Buffett tells CNBC in a live interview on this morning that he has “a lot of doubts” about Kraft’s planned purchase of Cadburyand that he “feels poorer” in the wake of the deal.
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The deal does not need to be approved by shareholders, but “If I had a chance to vote on this, I’d vote no.
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​...He thinks “deal momentum” fueled by the investment bankers may have helped push the Kraft-Cadbury deal forward."​​- CNBC, January 20, 2010

The offer valued Cadbury at about 13x EBITDA, a lower multiple than Mars had paid for Wrigley two years earlier.

In 2011 Rosenfeld announced a split, completed in October 2012.

Cadbury, Oreo, and the rest of global snacks became Mondelēz International.

North American grocery (Kraft macaroni and cheese, Oscar Mayer, Jell-O, Maxwell House) became Kraft Foods Group.

Kraft Foods Group was a slower-growth, cash-generative grocery business.

In 2015 it was bought by Heinz, backed by Berkshire Hathaway and 3G Capital, in a deal valued at about $46 billion.

The new Kraft Heinz cut costs aggressively. Margins rose at first, but brands were underfunded, sales stagnated, and in February 2019 the company took a writedown of about $15.4 billion on Kraft and Oscar Mayer.

Mondelēz, which kept Cadbury, was the healthier heir. It remained a global snacks company and generally outperformed the grocery side, even though it never became the high-growth story some investors expected in 2012.

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Sieva

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Disclaimer: nothing here is investment advice. Please do your own research. The information above is just for information and learning.

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