Hostile takeovers: A Brum deal

Few transactions since the collapse of Lehman Brothers have generated as much press and political attention as the successful £11.9bn ­acquisition of Cadbury by Kraft Foods. Given the much-loved nature of Cadbury products in the UK, the transaction was always going to result in column inches.

Additionally, and partly due to the political situation at the time, the transaction has been the catalyst for an extensive public consultation on proposed amendments to the rules by which takeovers in the UK are regulated, ensuring that the legacy of the combination may last well beyond its successful completion in the early part of 2010.

This article provides an overview of how the takeover developed, with a particular emphasis on four aspects of the acquisition process: the use of a ’possible offer’ announcement; the ’put-up or shut-up’ ­deadline; the eventual revision of the offer, and certain complexities that arose due to the US regulatory regime to which the offer was subject.

Kraft’s unsolicited bid for Cadbury emerged on the public stage following the release of an announcement on 7 September 2009 under Rule 2.4 of the UK’s City Code on Takeovers and Mergers. The announcement publicised that Kraft had approached Cadbury at the end of August to propose a combination of the two companies, but that the approach had been rejected by the Cadbury board. Kraft also stated the amount of its possible offer in the announcement - 745p for each existing Cadbury share, comprising 300p in cash and 0.2589 new Kraft shares.

An announcement under Rule 2.4 of the code is an announcement of a possible offer and has a different effect from one released under Rule 2.5, which publicises a bidder’s firm intention to make an offer. Perhaps the most important difference is that, once a firm intention announcement is released, a bidder is bound to make a formal offer to target shareholders and can only back out in ­exceptional circumstances. The release of a possible offer announcement does not carry that obligation.

For this reason the content of a ’firm ­intention’ announcement is also more regulated. For example, before releasing a firm intention announcement, the code requires a bidder and its financial advisers to ensure it has sufficient funds in place, often in the form of a bank loan with very limited conditionality, to cover the full amount of any cash to be paid to accepting target shareholders under the offer and to confirm that the cash will remain available. A possible offer announcement does not have similar content requirements.

In the context of an approach to a target that is initially rejected - ie a ’hostile’ situation – the use of a possible offer announcement to publicise the bidder’s proposal puts the proposal directly in front of target shareholders and may put pressure on target directors to engage with the bidder and hopefully agree a recommended deal. Such an announcement is often termed a ’bear hug’ announcement or a ’virtual offer’, and is ­becoming an increasingly common feature of the UK market. The Kraft possible offer announcement on 7 September did not include a knock-out price for Cadbury shareholders. However, it did have certain other consequences. First, because the code places limits on how many third parties a bidder can disclose details of a possible offer to prior to public ­announcement, Kraft was free to discuss its interest more widely, including with Cadbury shareholders. Second, it was a clear signal of intent to the market and any potential rival bidders that Kraft was serious about a combination with Cadbury.

Put up or shut up
The release of a firm intention announcement starts the offer timetable and begins a countdown towards a series of deadlines for a bidder and target under the code, which ­ultimately conclude with a successful or a failed takeover. The release of a possible offer announcement, such as Kraft’s 7 September one, does not start the timetable. However, such an announcement will signal the beginning of a period of uncertainty for the target, as it is put in play.

One of the code’s general principles, which form the basis of the UK takeover regime, is that a target company “must not be hindered in the conduct of its affairs for longer than is reasonable by a bid”. For this reason, following a possible offer announcement, the code permits the target to request the Panel on Takeovers and Mergers to require a deadline for the bidder to clarify its intentions, often referred to as a ’put up or shut up’ or ’PUSU’ deadline. Once announced, the bidder must either issue a firm intention announcement or an announcement that it does not intend to make an offer by the PUSU deadline, in which case it will have to down tools and will be restricted from taking steps towards making another offer for the target within a six-month period.

PUSU deadlines are generally negotiated fiercely by both sides with, and then publicly announced by, the panel. Bidders will commonly argue to the panel that they need more time to prepare their bid (for example to prepare documents, obtain financing and consult regulators), and targets will naturally argue for less time in order to force the bidder’s hand. On 30 September the panel announced a PUSU deadline on Kraft of 5pm on 6 November 2009 - the clock was ticking.

Issue and revision of the bid

Kraft released its firm intention announcement four hours before the PUSU deadline, maintaining its original price and starting a period of 28 days in which it had to publish its offer. The first full offer document was issued on 4 December, which represented ’Day zero’ under the offer timetable in the code. However, it was not until 19 January (Day 46) - the last date that, in the absence of a competing bid, a bidder can revise its offer - that Kraft increased its offer price and issued its revised and final offer document.
In the period between the two offer documents a lot had happened. Cadbury had prepared two defence documents arguing against Kraft’s bid and Kraft had sold its frozen pizza business and announced it would use the proceeds to offer target shareholders the ability to elect for more cash but fewer shares. Meanwhile, Nestlé had publicly ruled itself out as a competing bidder and the panel had announced PUSU deadlines on Hershey and Ferrero, which had each publicly stated that they were ­considering competing bids.

Many expected that the transaction would remain hostile to the end. However, at the last minute the Cadbury board agreed to ­recommend to its shareholders to accept the revised bid, and the final offer document was ­published 15 minutes before the Day 46 deadline with a revised offer price of 840p per Cadbury share, comprising 500p in cash and 0.1874 Kraft shares.

As the PUSU deadline imposed on Hershey and Ferrero was not until 25 January Kraft had to wait and see whether either company, or any other bidder, would mount a competing bid. Happily for Kraft there was no competing bid and its offer was declared successful on 2 February this year.

US considerations
Kraft’s bid for Cadbury was the first time a US-listed company had offered its own shares as payment in a major hostile bid for a UK target and it is difficult to overstate the impact US regulatory issues had on all aspects of the transaction. For example, Kraft and its advisers had to produce two sets of offer documents at every stage of the process, one for the US and one for everywhere else. The US offer document was also subject to an ongoing review process by the US Securities and Exchange Commission (SEC), and SEC comments on that document needed to be incorporated on a rolling basis.

This was very different from the UK model, where the offer document was finalised and published on 4 December and then revised on 19 January. Despite that, both documents needed to be consistent with each other and the requirements of the code, while still adhering to the differing standard forms that would be familiar to shareholders in each market.
In the above context, legal advisers also needed to ensure that both documents still communicated a single offer so that Kraft could eventually acquire the shares of any Cadbury shareholders who did not accept the final offer under a process known as a ’squeeze-out’.

The code provides a limited ability for target shareholders who have accepted an offer to withdraw that acceptance. The SEC required the right to withdraw to be available to target shareholders throughout the bid - meaning that until Kraft had publicly declared that its offer would definitely be successful there was no certainty that target shareholders who had accepted the offer would not withdraw their acceptances and cause it to fail.

All of the above required constant liaison between UK and US advisers and the client within an offer timeline, which had to adhere to both the timetable set by the code and the requirements of the US rules.

Tasty instruction

Clifford Chance advised Kraft on its bid. The firm was involved at every step of the process, including advising on the bid ­structure and ­tactics, preparing and negotiating documents and discussions with the panel, including the PUSU deadline. Slaughter and May advised Cadbury.

Jargon buster

• Bear-hug announcement - A ’possible offer’ announcement made by a potential bidder with the intention of encouraging ­target ­shareholders to pressurise ­target directors to engage with a bidder.
• Code - The City Code on Takeovers and Mergers are the regulations that govern public takeovers in the UK.
• Firm intention announcement - An announcement by a bidder of a firm intention to make an offer for a target under Rule 2.5 of the Code. The content of a firm intentionannouncement is highly regulated and signals the start of the offer timetable. Once released, and absent exceptional circumstances, a bidder is obliged to make a formal offer to target shareholders.
• Panel - The Panel on Takeovers and Mergers is the independent body responsible for regulating takeovers and issuing and administering the Code.
• Possible offer announcement - An announcement by a ­potential bidder of a
  possible offer for a target under Rule 2.4 of the Code. The release of a possible offer announcement begins the ’offer period’, signalling a period of uncertainty for the target, but does not begin a countdown of the offer timetable.
• Put-up or shut-up (PUSU) deadline - The time limit announced by the panel by which a potential bidder must clarify its intentions with respect to a target. The purpose of such a deadline is to balance the risk between a target being subject to a siege for an excessive period and target shareholders being deprived of a chance to consider a possible offer
• SEC - The US Securities and Exchange Commission is the regulatory body with responsibility for enforcing US securities laws and regulating the US securities market.

Patrick Sarch is a partner and James Bole is a senior associate in the corporate department at Clifford Chance