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Stock of the Day
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Kraft (KFT)
Kraft-Cadbury Saga Continues, Buffett Voted Against Kraft Bid
Kraft (KFT: Charts, News, Offers) is still trying to acquire Cadbury (CBY: Charts, News, Offers) with its $16 billion in cash and stock offer. The latest development involves Kraft increasing the cash portion to sweeten the deal a little more for Cadbury. This announcement came on the same day that Kraft announced it was selling its North American frozen pizza business to Swiss food giant Nestle for $3.7 billion. But luck wasn't on Kraft's side and Cadbury rejected the new bid yet again, calling it "derisory." Worse yet, Warren Buffett, the CEO of Berkshire Hathaway (BRK.A: Charts, News, Offers), which owns 138.3 million shares, or 9.4 percent of Kraft -- making Berkshire the largest shareholder -- said he voted against Kraft's plan to issue 370 million shares to finance its bid for the British candy maker. Forget about why Cadbury rejects the deal; let's take a look at why Warren Buffett thinks this is a bad deal.
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As part of the new deal, Kraft is asking shareholders to approve a proposal that would let Kraft issue 370 million common shares to finance the Cadbury deal. Kraft began mailing voting materials to shareholders last month for a vote scheduled for February 1st. The company needs shareholder approval for the move to satisfy rules about increases in outstanding shares set by the New York Stock Exchange, where Kraft is listed. That said, existing shareholders are not really affected when a company issues new shares, because the diluted share of the company is offset by the new capital raised. However, this does create a potential risk if the company doesn't use the money wisely to create more value. So the fact that Berkshire will own only 7.5 percent of Kraft after the stock issuance isn't the real problem here -- although Buffett probably isn't too thrill about the fact that Berkshire paid an average of around $33 a share for the bulk of its Kraft holdings.
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In fact, Buffet said that he voted against Kraft's proposal to issue 370 million shares due to two reasons. First, he believes Kraft's shares, which closed at $27.43 on Tuesday, is undervalued and thus a very expensive currency to be used in the deal -- essentially giving Cadbury shares of Kraft at a deep discount. Buffett said in a statement Tuesday morning, "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." Second, he said a "yes" vote would give management the leeway to change the terms of the deal, further damaging shareholder interests. Buffet wrote, "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 so carefully described to shareholders in the proxy statement. We worry very much, indeed, that there will be a change."
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With Buffett's opposition made public, it is unlikely that other shareholders will vote against him. Without the votes and the ability to issue the 370 million shares, Kraft CEO Irene Rosenfeld's efforts to expand her company's global reach could be in jeopardy. Overall, the Kraft bid is worth about 740 pence per Cadbury shares. But Cadbury shares have traded near 800 pence in London, as investors wager that Kraft would be willing to raise its offer. However, Kraft is being very careful about not overspending for Cadbury. If this plan fell through, it could be back to the drawing board for Kraft's management, or the acquisition could be off altogether.
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More news about Kraft:
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Other stocks in the news:
- Domino's CEO Leaving; To Be University Of Michigan Athletic Director -- Domino's Pizza Inc. (DPZ: Charts, News, Offers) Chief Executive David A. Brandon will step down in March to join the University of Michigan, his alma mater, as athletic director.
- Google poised to take wraps off new mobile phone -- Google (GOOG: Charts, News, Offers) expected to raise stakes in mobile market with new phone designed by its own engineers.
- How Visa, Using Card Fees, Dominates a Market -- An interesting look at the history of debit card war and how Visa's (V: Charts, News, Offers) strategy enabled it to dominate the market today.
- Mesa Air files for Ch. 11 bankruptcy protection -- Mesa Air Group Inc. (MESA: Charts, News, Offers), whose operations include flying regional routes for major airlines like Delta, United and US Airways, has filed for Chapter 11 bankruptcy protection, hoping to shed financial obligations for leases on airplanes it no longer needs.
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