News Analysis

Echoes of Coke: Buffett Reins in Kraft


By Andrew Frye

(Bloomberg) — Warren Buffett, the billionaire investor who helped scuttle Coca-Cola Co.'s (KO) bid for Quaker Oats 10 years ago, is restraining Kraft Foods Inc. (KFT) in its quest to acquire Cadbury Plc.

Buffett's Berkshire Hathaway Inc. (BRK/A), Kraft's biggest shareholder, urged fellow investors to oppose a plan to issue as many as 370 million shares to help buy the U.K.-based candy maker. Kraft Chief Executive Officer Irene Rosenfeld is seeking a "blank check" for the deal, Berkshire said yesterday.

"I think Buffett's got it nailed," said Donald Yacktman, founder of Yacktman Asset Management Co., which holds Kraft shares. "Kraft is hemmed in—there's only so much they're going to be able to do to make this acquisition."

Buffett, who has said shareholders must act like owners, urged caution in negotiations after Cadbury rejected Kraft's bid of £10.6 billion ($17 billion). In publicly asking others to join him, the 79-year-old Berkshire chairman is drawing on his power as a 9.4 percent owner of Kraft and his standing in financial markets as the world's preeminent investor.

Berkshire said it may support a Cadbury takeover if it concludes this month that the final offer "does not destroy value for Kraft shareholders." Buffett's assistant, Carrie Kizer, said the company had no comment.

"If he says no, everybody else is going to pile on and say no too," said Justin Fuller, a partner at Midway Capital Research & Management who runs the buffettologist.com Web site.

Disagreed with CokeBuffett was the most vocal dissenter on Coca-Cola's board when directors met in 2000 to discuss a $15.3 billion bid for Quaker Oats, the maker of Gatorade, Cap'n Crunch cereal and Rice-A-Roni. Buffett argued the price was too high because a stock swap proposed as part of the deal would give up more than 10 percent of Atlanta-based Coca-Cola, board member James Williams said in an interview about three years later.

The board voted against the acquisition, and PepsiCo Inc. bought Quaker Oats in August 2001 for $14 billion. Berkshire remains the largest shareholder in Coca-Cola. Buffett's company also holds the biggest stakes in American Express Co. and Wells Fargo & Co.

"It's unusual for Berkshire to put out any sort of comment like this publicly," said Glenn Tongue, a partner at T2 Partners LLC, which holds investments in Omaha, Nebraska-based Berkshire and Kraft. Buffett's opposition to a stock sale may prevent Kraft from overbidding, he said. "As a shareholder, I love seeing this," he said.

Buffett's RecordBuffett won a global following as the "Oracle of Omaha" by profiting from investments in out-of-favor companies and firms he believes have unassailable advantages, including See's Candies and ice-cream maker Dairy Queen. He agreed to buy $6.5 billion in debt and preferred shares in Wm. Wrigley Jr. Co. to help Mars Inc. acquire the chewing-gum maker in 2008. Last year, Berkshire bought stock in Kraft rival Nestle SA.

"I'm not surprised that Berkshire would resist issuing shares," said Tom Russo, partner at Gardner Russo & Gardner, which holds Berkshire, Cadbury and Vevey, Switzerland-based Nestle. Buffett "has had the longstanding belief that equity capital is very scarce."

Rosenfeld, CEO at Northfield, Illinois-based Kraft since 2006, is seeking to buy Cadbury, the maker of Creme Eggs and Trident gum, to expand outside the U.S. Kraft raised the cash portion of its bid yesterday after agreeing to sell pizza brands including DiGiorno and Tombstone to Nestle, the world's largest food company.

'Expensive' SharesHershey Co.'s (HSY) executives and board members are divided on whether to make a bid for Cadbury and have yet to arrange financing for an offer, said people with knowledge of the matter. The board met Jan. 4 without reaching a decision, said the people, who declined to be identified because the talks are private.

Some members of Hershey's controlling trust, led by former Pennsylvania Attorney General Leroy Zimmerman, have been advocating a deal, while Chief Executive Officer David West is among those concerned about the debt a purchase would entail, the people said.

Cadbury fell 3.2 percent to 779 pence yesterday in London, the biggest drop in eight months. Kraft added $1.34, or 4.9 percent, to $28.77 in New York trading. That values Berkshire's stake at more than $3.9 billion.

Buffett said in the statement that Kraft shares were "very expensive 'currency'" after falling about 17 percent in the two years ended last week, and he criticized management for seeking to issue stock at current prices after repurchasing shares at $33 in 2007. Kraft executives "have to do a lot of things right to justify this price," Buffett said in September on CNBC.

"We agree that Kraft Foods shares are deeply undervalued," the foodmaker said in a statement. "We intend to remain disciplined in this process."






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