Kraft Foods recently released a proxy statement calling for a meeting in which shareholders will decide whether to let it issue up to 370 million shares in order to boost its offerings for a Cadbury buyout. Warren Buffett, whose Berkshire Hathaway is the company’s largest shareholder (9.4%), did not cozy to this idea. He not only voted against the plan, but also issued a cautionary press release to Kraft management today:
“The share-issuance proposal, if enacted, will give Kraft a blank check allowing it to change its offer to Cadbury – in any way it wishes – from the transaction presented to shareholders in the proxy statement. And we worry very much that, indeed, there will be an additional change from the revision announced this morning.
To state the matter simply, a shareholder voting “yes” today is authorizing a huge transaction without knowing its cost or the means of payment.
What we know with certainty, however, is that Kraft stock, at its current price of $27, is a very expensive “currency” to be used in an acquisition. In 2007, in fact, Kraft spent $3.6 billion to repurchase shares at about $33 per share, presumably because the directors and management thought the shares to be worth more.
Does the board now believe those purchases were a mistake and that Kraft’s true value is only the current price of $27 per share – and that it is therefore fine to structure a major acquisition based upon that price? Would the directors use stock as merger currency if the price were, say, $20 per share? Surely the true business value of what is given is as important as the true business value of what is received when an acquisition is being evaluated. We hope all shareholders will use this yardstick in deciding how to vote.
Our understanding is that Kraft must announce its final offer for Cadbury by January 19th. If we conclude at that point that the offer does not destroy value for Kraft shareholders, we will change our vote to “yes.”
At this time, however, we believe no shareholder should vote “yes” when he can’t possibly know what he is voting for.”
Rational Walk’s Ravi Nagarajan has a good analysis of the Berkshire press release:
It is unusual for Warren Buffett to publicly criticize the management of companies in which Berkshire holds minority positions…the statement (in the first paragraph of the press release)…reveals a lack of confidence in management to protect shareholder interests and profound dissatisfaction with the slightly sweetened terms of Kraft’s offer for Cadbury which were announced this morning.
…we see the familiar standard that Mr. Buffett has long used to measure whether using stock in an acquisition makes sense for the acquirer: As much business value must be received as the company is giving up in the share issue. This does not mean that Kraft cannot use “undervalued” shares to purchase another company, but the target company must be at least as “undervalued” as Kraft if stock is employed in the transaction.
While the press release keeps open the possibility that Berkshire may change its vote to “yes” if the terms of Kraft’s final offer for Cadbury (due by January 19) are acceptable, today’s press release clearly is intended to send a message to Kraft’s management and board. Perhaps the most amazing aspect of today’s drama is that Kraft CEO Irene Rosenfeld either did not consult with her biggest shareholder in advance or knew of Mr. Buffett’s opposition and went ahead regardless. In either case, Mr. Buffett’s reason to criticize management in a very public way seems very justified.
CNNMoney says that “Kraft, apparently referring to Buffett, noted in its statement Tuesday that certain shareholders “have expressed a desire for Kraft Foods to be more sparing in its use of undervalued Kraft Foods shares as currency for the offer.”