Buffett Rejects Kraft’s Proposal for Cadbury Bid

Warren Buffett said Tuesday he voted against Kraft’s (KFT) proposal to issue 370 million new shares to finance its $16.5 billion hostile takeover bid for British candy maker Cadbury (CBY).

Berkshire Hathaway, the giant conglomerate run by billionaire Warren Buffett, owns about 138.3 million, or 9.4%, of Kraft’s shares. It says it is Kraft’s largest shareholder.

The news came on the same day that Kraft, the second largest food co. in the world with annual revenues of $42 billion, announced it was selling its North American frozen pizza business to Swiss food giant Nestle for $3.7 billion. Kraft said it would use the proceeds from that sale to increase the cash portion of its offer for Cadbury. Cadbury rejected the new bid saying that the cash alternative did little to improve Kraft’s offer, once again calling it “derisory.”

Here is the text of the statement released by Berkshire on Kraft’s proposal for authorization to issue 370 new shares which would facilitate the purchase of Cadbury.

“OMAHA, Neb.–January 05, 2010– Berkshire Hathaway Inc. (BRK.A; BRK.B): Berkshire Hathaway has voted “no” on Kraft’s proposal to authorize the issuance of up to 370 million shares to facilitate the acquisition of Cadbury. Berkshire, taking into account both its own holdings and those of its pension funds, believes that the 138,272,500 Kraft shares it owns — 9.4% of the total outstanding — make it the company’s largest shareholder.

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.”

Source: Berkshire Hathaway

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