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Buffett Calls Strike 2 on Kraft

If investors dunked an Oreo every time fresh news broke about packaged-foods producer Kraft (NYSE: KFT  ) , the past few months would've left us with a lot of bulging waistlines. Yesterday, Warren Buffett weighed in on the company's protracted bid for U.K.-based confectioner Cadbury (NYSE: CBY  ) -- and he didn't bring a friendly glass of milk to the table.

Buffett previously characterized Kraft's bid as a "full price" offer, while also warning the American food icon not to overpay for Cadbury's chocolatey goodness. This time, however, the Oracle put his vote where his mouth is. Buffett's Berkshire Hathaway (NYSE: BRK-A  ) , Kraft's largest shareholder, came out staunchly against the company's proposal to issue 370 million shares in support of the Cadbury deal.

Berkshire makes a few salient points here. First, Kraft requires only 366 million shares in order to meet the existing terms of its cash-and-stock bid. But let's be honest -- 4 million additional shares are no biggie, which apparently is the basis on which the company has "rounded up" the figure to 370 million in its shareholder proxy. On this note, a Berkshire release reads:

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 ... we worry very much that, indeed, there will be an additional change from the revision announced this morning.

Buffett, apparently, doesn't trust Kraft management to exercise buyer's restraint. Of course, the bold language could be equally meant for Cadbury's top brass, warning the maker of Dentyne, Halls, and eponymous Creme Egg products not to expect an enriched bid.

Second, Berkshire notes that Kraft stock is a "very expensive 'currency'." Shares trade at $27 today, versus $33 in 2007, when the company completed a $3.6 billion buyback. Indeed, Berkshire could have further observed that shares sit below 2001 levels, compared to modest stock gains for competitors.

Meanwhile, Kraft yesterday announced an agreement to sell its North American frozen-pizza business to global behemoth Nestle (OTC: NSRGY), in exchange for $3.7 billion in cash. Kraft intends to use the proceeds to boost the cash portion of its Cadbury tender, hoping to win over reluctant shareholders on both sides.

In the process, however, Kraft relinquished a business that had been growing by double digits in recent quarters, thanks to a strong value proposition and the rise of at-home dining. Management vowed that it suffered no loss, since its U.S.-centric DiGiorno and California Pizza Kitchen brands did not fit with the company's global expansion strategy. Frankly, I don't buy that. I believe Kraft flipped the pie because it was the only non-core business that could fetch a decent premium.

I've been cautious on Kraft, and these events only add to my tentative outlook. Investors might instead consider Nestle the better play on industry consolidation. Although the company has confirmed that it won't be making a move for Cadbury, the Kraft deal demonstrates that Nestle's management is happy to play the acquirer. Moreover, a pending sale of its Alcon (NYSE: ACL  ) stake is expected to haul in $28 billion. Given that pile of dough, Wall Street watercooler talk hints that Nestle might make a run at its cereal joint-venture partner General Mills (NYSE: GIS  ) , or infant-nutrition specialist Mead Johnson.

As for Cadbury's fate, the company was doing quite well on its own. But with Nestle out of the picture, and Hershey's (NYSE: HSY  ) board still split on a potential bid, Cadbury shares may not revisit their 2009 highs.

As the market awaits further developments, investors who are actively buying in this space would do well to heed Buffett's advice: Don't pay more than full price.

Do you agree with the Oracle that Kraft is making a rash acquisition? Or should Buffett just relax and nibble on a chocolate egg? Sound off in our comments below.

Berkshire Hathaway is a Motley Fool Inside Value recommendation, a Stock Advisor selection, and a Motley Fool holding. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Mike Pienciak holds no financial interest in any company mentioned in this article. The Fool has a disclosure policy.

Read/Post Comments (8) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 06, 2010, at 2:55 PM, mitleg wrote:

    I am not really that impressed with the proposed deal. I agree that the price is steep, and I am not that impressed by the strength of the Cadbury brands, at least here in the US.

  • Report this Comment On January 06, 2010, at 4:20 PM, elroyturtle wrote:

    Warren Buffet is right. Kraft should not raise its offer since nobody else is buying. It certainly should not give up the fast growing pizza brands. There is a good reason Nestle wants those rather than Cadbury. Kraft ought to simply stay with its offer and let it expire. There are other opportunities out there.

  • Report this Comment On January 06, 2010, at 4:29 PM, Ibeatmykids wrote:

    meh..... For some reason I just do not find Kraft or Cadbury very exciting.

  • Report this Comment On January 06, 2010, at 4:55 PM, Ellisee wrote:

    Do any buffett watchers see the irony here?

    Buffett collars the stock percentage of his purchase of BNI at way undervalued for BRK (80,000? give me a break) to fair price for BRK. Buffett has admitted that most stock deals he has done in the past have hurt the shareholders, and yet he goes out and criticizes KFT for the same type of shenanigans.

    Granted, he is not overbidding by much for control of BNI, but if BRK shares dove to 80,000 before the merger, he would be overpaying by a lot.

    full price is full price, and undervalued stock is undervalued stock, no matter whose it is.

  • Report this Comment On January 06, 2010, at 9:30 PM, xetn 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 presented ... we worry very much that, indeed, there will be an additional change from the revision announced this morning."

    Sounds like the US Treasury and the Fed, along with their co-conspirators in the Congress.

  • Report this Comment On January 07, 2010, at 12:04 AM, predfern wrote:

    Kraft is a cheese company. Isn't cheese used to make pizza?

  • Report this Comment On January 07, 2010, at 9:33 AM, mcpoc wrote:

    I'm a novice investor and own some CBY shares. Is anyone willing to share some plain-language advice on my first experience with buyouts?

  • Report this Comment On January 07, 2010, at 11:40 AM, DrUNglue wrote:

    Kraft and Cadbury? You've got to be kidding. There are those who would say that Kraft is one of the worst managed food companies on the planet ... and it looks like they might be correct. Kraft should take a close look at what their partner Nabisco did with the confection business. Does disaster waiting to happen ring a bell? I feel for those poor unfortunate Cadbury employees should this deal go through. Except of course for the "fat cats" who always come out smelling like a rose while the lowly little grunts get the shaft.

    Yes Kraft is in the cheese business and of course that's why it makes so much since for them to get out of the pizza buisiness and into the Gum and Chocolate Egg buisness ... HAW!! Been there failed there ... look at the history.

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