Kraft’s dogged pursuit of Cadbury gives rise to transatlantic mêlée
11 January 2010 | By Gavriel Hollander
19 January 2010
26 October 2010
13 June 2011
12 March 2012
10 May 2010
Despite competition clearance and a fair valuation, the deal could still go either way, says Gavriel Hollander
In these sober economic times, the hostile takeover is something of an endangered species, but Kraft’s highly publicised swoop for chocolate maker Cadbury has created enough headlines to make up for the dearth of deals elsewhere.
The Cadbury-Kraft saga has been rumbling on since the dog days of summer, but matters are now coming to a head. And for the clutch of international firms that have been sniffing around the Bournville empire, the past few months have yielded their fair share of work.
Indeed, for a whole generation of lawyers, a deal such as this represents uncharted territory.
“These sorts of things just don’t happen, especially in a deal-starved environment,” says one partner close to the negotiations. “From a legal point of view it’s an amazingly complicated deal, with no real precedent.”
It is the multijurisdictional and multidisciplinary nature of the deal that has excited legal minds on both sides of the Atlantic. With the target company’s major shareholders spread across two continents, competition disputes cropping up around the world and one of the planet’s leading financiers looming in the background, it is anything but vanilla.
Clifford Chance and Slaughter and May are leading the pack, acting as the main transactional advisers to Kraft and Cadbury respectively. US corporate partner Sarah Jones and her London counterpart Guy Norman are leading the Clifford Chance team on the deal. Slaughters head of M&A Steve Cooke and corporate partner Tim Boxell are taking the lead for longstanding client Cadbury.
A host of leading US firms have also got in on the act. With 40 per cent of its shareholders based in the States, Cadbury has brought in longstanding US adviser Shearman & Sterling, led by London corporate partner Creighton Condon, to work alongside Slaughters.
Kraft has enlisted Gibson Dunn & Crutcher to advise on US securitisation aspects and Cravath Swaine & Moore to assist with the financing of the deal. Arnold & Porter is acting on US and EU competition aspects, with London antitrust partners Tim Frazer and Susan Hinchliffe leading.
Other firms involved include Cahill Gordon & Reindel, which is advising the bank syndicate arranging bridge financing, and Herbert Smith, which is handling cash confirmation work on behalf of financial advisers Citi, Deutsche Bank and Lazard.
The timing of the late summer move by Kraft revived long memories in the City of the glory days of 1980s corporate sharking.
“It was completely out of the blue,” says a corporate partner familiar with the deal. “It was an opportunistically timed bid. Cadbury has made huge strides, but the returns won’t have shown up yet.”
Another partner at a City firm agrees that Cadbury did not look like a likely takeover candidate. “They’ve had a good couple of years,” he explains. “They’re not a weaker company than Kraft.”
All of which makes Kraft’s initial offer of 740p per share appear optimistic, or to use Cadbury’s own bullish language, “derisory”. Cadbury’s share price had hovered around the 800p mark since the opening bid, with the consensus being that any offer below 850p would be batted back.
But the landscape shifted last week after the surprise intervention of Warren Buffet. The veteran investor, whose Berkshire Hathaway investment vehicle is Kraft’s biggest shareholder, warned the US food giant not to pay over the odds for its transatlantic target.
“He’s fired a shot across the bows,” explains the corporate partner. “He didn’t say he wouldn’t vote for the deal as it is, but that he didn’t think it should increase.”
The move could be seen as a Machiavellian bid to keep Kraft’s final offer low, especially as the immediate impact was a sharp fall in Cadbury’s share price matched by a hike in Kraft’s. But the corporate partner disagrees.
“That’s not his style,” he says. “He tends to say what he thinks. The impact is that market speculation that the deal will get done has diminished. It puts more pressure on Kraft - the deal is less likely today [than it was last week].”
Perversely, the news brought the real-term value of Kraft’s bid above Cadbury’s share price for the first time. At the same time, the European Commission gave the green light to the takeover, clearing the final competition obstacle from Kraft’s path.
The decision, hailed by Hinchliffe as “a landmark case for complex deals of this nature”, was the first time a hostile bid launched on the London Stock Exchange had been cleared through the use of the divestment of target assets.
Such good news has done little to convince Cadbury shareholders about the merits of the deal. As of last week just 1.5 per cent of shareholders had accepted the bid in its current state, despite the valuation gap disappearing.
Lawyers on both sides still say the deal is in the balance. The consensus is that Kraft will have to up its bid by the 19 January deadline, with the offer remaining open until 2 February.
That is currently the date on which the work for the phalanx of lawyers involved in the deal would start to dry up, but the waters could be further muddied if other bidders enter the race.
Nestlé ruled itself out after acquiring Kraft’s lucrative pizza businesses, but other suitors, including Hershey and Ferrero, could still be in the running.
“If someone new comes in it’s most likely to be Hershey or Hershey with somebody,” says another partner close to the deal. “It could make the deal drag on.”
In a desolate M&A landscape, few corporate lawyers will be crying into their beer if that proves to be the case.