The inside story of the Cadbury takeover

Published: March 12 2010

Todd Stitzer had been working for

Todd Stitzer: “Cadbury lusted after being the largest
Cadbury Schweppes for nearly 20 years
chocolate company in the world”
when he was called by its chief executive
one day in February 2000 and handed a mission to complete. Harvard-educated and ambitious,
the 47-year-old American, then based in Dallas, Texas, had won attention at Cadbury’s London
headquarters for masterminding the acquisition of several soft drinks brands in the US, including
7UP and Dr Pepper. Now his boss, John Sunderland, wanted him to move to London to do the
same thing for the confectionery side of the business: get out there and start buying companies.

It had been three decades since a merger between a revered British confectionery group and a -
soft drinks brand created by a German-Swiss watchmaker had formed Cadbury Schweppes, and
Sunderland had made some decisions about the company’s future. Cadbury was number three in
the global soft drinks market, but he knew it would never overtake the two leaders, Coca-Cola
and Pepsi. On the other hand, the market for chocolate and other sweets was much more open,
split among a big group of international companies including Mars, Wrigley, Kraft, Hershey,
Ferrero and Nestlé. “We had a real opportunity to become the leading confectionery house,”
Sunderland says.

Two weeks after his discussions with Sunderland, Stitzer moved from New York to London to
become the company’s chief strategy officer. He put together a team to evaluate possible
acquisitions and got to work. After one more big soft-drinks deal – the purchase in late 2000 of
Snapple for £986m from Triarc, an American restaurant chain – Stitzer’s team turned its
attention to confectionery companies. “Forever Cadbury lusted after being the largest chocolate
company in the world,” Stitzer says at Cadbury’s headquarters in an office park in west London.
That’s where its roots were, after all – drinking chocolate. “But the fastest-growing, highest-
margin part of the confectionery business was the gum business.” His team, with Sunderland’s
approval, started chasing chewing-gum brands, picking up names such as Hollywood and Dandy.

In December 2002, they made a bolder move, spending $4.2bn to buy a gum company called
Adams that had been put up for sale by the US drugs company Pfizer. Adams was not the biggest
gum group in the US – that title was held by Wrigley – but its products were desirable: Trident
sugar-free gum, Dentyne Ice chewing gum and Halls cough lozenges. More important, the deal
made Cadbury the biggest confectionery company in the world, albeit on the back of a wider
range of products than simply chocolate and sweets.

Nor was the deal just a gambit to gain prestige. Profit margins in Cadbury’s core confectionery
business had been falling in the late 1990s and early 2000s, indicating its growth was in decline.
“The performance of the company was not exciting,” says Roger Carr, who took over from
Sunderland as chairman in July 2008. “There was slow growth, and people were not at all
enamoured by the business model. Few institutions in the UK wanted to buy the stock. The only
people who saw investment potential were the Americans.”
...

Acquisitions alone wouldn’t solve Cadbury’s problems, according to Stitzer. Its organic growth
was weak because it was spending less than its peers on marketing, innovation and capital
expenditure. “We agreed as a team,” he says, referring to Cadbury’s top executives, “that we
would revitalise Cadbury around a revenue-growth model that would deliver financial benefits if
managed or operated in the right way.”

Analysts and investors, however, were sceptical about some of the purchases that were supposed
to support that strategy, particularly the deal to buy Adams. Many believed Cadbury Schweppes
had overpaid. Its share price, which had approached 600p on the London Stock Exchange in
2002, slid close to 400p in early 2003.

In May 2003, the company’s board – undaunted by the market’s scepticism – asked Stitzer to
take over from Sunderland as CEO, citing him as the best person to lead the company forward in
its “continuing drive for growth and efficiency”. Sunderland moved up to become chairman. If
anyone before had doubted the direction in which Stitzer wanted to take Cadbury, it became
clear during a series of financial presentations he made to investors in London and New York
that October. He outlined an ambitious restructuring programme, Fuel for Growth, which aimed
to achieve substantial increases in sales and profits between 2004 and 2007. Stitzer also followed
Sunderland’s thinking back in 2000 to its next logical step. Inside the company, a conversation
began about getting out of soft drinks.

Although the Adams acquisition had made Cadbury the world’s biggest confectionery group, its
global market share was just 10 per cent – so it retained only a slim lead over its competitors. For
decades, Cadbury’s management had fantasised about teaming up with Hershey. The American
company had bought the licence to make and sell Cadbury-branded products in the US in the late
1980s and was considered an ideal partner. In 2002, Cadbury joined forces with Nestlé to try to
buy Hershey (which also owns the US licence to Nestlé’s Kit Kat brand), while Wrigley also
made an offer. But Hershey is run by a charitable trust reluctant to lose control of the company,
and it backed away from a sale before any deal could be completed.

Stitzer believed Cadbury could broaden its deal-making options if it had more firepower. If it
sold the US drinks business – estimated to be worth up to $13bn – it could target other
confectionery companies such as Italy’s Ferrero (which owned brands like Ferrero Rocher and
Kinder) as well as the European arm of Kraft, which included brands such as Milka, Côte D’Or
and Toblerone. “We had roughly a one-tenth share of the global confectionery market and felt
there were opportunities that would allow us to get to 15 per cent or 16 per cent,” Stitzer recalls.
“But we needed significant financial assets to get us there.”

...

While Stitzer and his management team were planning global domination of the confectionery
world, Cadbury Schweppes investors were worrying about the company’s financial performance.
In early 2006, the company decided to off-load its European soft drinks brands, which included
Orangina and Oasis, for €1.85bn to private equity fund Lion Capital and hedge fund Blackstone.
(Three years later, after increasing sales and profits, Lion and Blackstone sold Orangina
Schweppes to Japan’s Suntory Group for €2.6bn.) The sale led to market speculation that
Cadbury might also be on the verge of selling its US drinks brands and the company’s stock
price rose. In public, however, Cadbury executives remained tight-lipped.

The year 2006 was a bad one for Cadbury. Salmonella contamination in some of its British
factories forced it to recall more than a million chocolate bars, a safety breach that earnt a £1m
fine. Its profits were hit by an accounting scandal in Nigeria, and the Fuel for Growth plan
missed its financial targets.

What investors didn’t know was that in October 2006, Cadbury’s management had
recommended to the board that it should get rid of the US brands. But nothing was said in public
to that effect. In fact, at an investor conference in London that same month, Cadbury’s
management indicated they had no plans to split the remaining soft drinks and confectionery
businesses. They did, of course, but there was no agreement about how to do it. Sunderland, as
chairman, was reluctant to sell without having lined up a confectionery deal on which to spend
the proceeds, worrying that unless they did that, Cadbury would turn itself into a takeover target
for a rival. It was a case of eat or be eaten.

For his part, Stitzer now says he didn’t want to set rumours running in the market by hinting at a
sale before Cadbury was ready to go ahead. “What you don’t want to do is create a speculative
frenzy about a particular asset: it’s deleterious to the running of the business.” Equally, he and
his fellow managers would have been unwise to try to force their board into agreeing to a sale by
letting word of the idea leak out.

...

While management and the board debated what to do, a figure from Cadbury’s recent past
reappeared on the scene. Nelson Peltz was the founder of a hedge fund called Trian Fund
Management and the investor behind Triarc, the restaurant chain that had sold Snapple to
Cadbury six years before. Now, he started taking an active interest in Cadbury once again.

Peltz liked confectionery. He believed it had strong growth potential and was not hampered by
competition from supermarket “own label” brands, as is the case with so many other products.
He began buying shares in Cadbury Schweppes in late 2006 and arranged a meeting with Stitzer
in London in February 2007. At that meeting, Peltz told Stitzer that Cadbury Schweppes should
be achieving the same kind of profit margins as Wrigley and Hershey, and that he wanted to see
its US soft drinks and confectionery businesses separated. His vision for Cadbury was similar to
Stitzer’s.

What Cadbury’s management didn’t realise was that Peltz wasn’t focused on Cadbury
Schweppes alone. In 2007 he also started buying shares in the US food company Kraft,
eventually building a 3 per cent stake. Peltz told Kraft it too could grow faster if it slimmed
down. Get rid of brands such as Maxwell House coffee, he said. Get rid of Post Cereals. See
what doors opened from there.
Peltz’s attempts to agitate for change progressively gained support. In early 2007, around the
time of his meeting with Stitzer, Cadbury Schweppes’ board learnt that one-third of its
shareholder register, which was weighted towards US investors, was pushing for the split. This
put the directors in a difficult position. They had been holding serious talks again with Hershey
about some kind of merger, but as had happened so often in the past, there was a significant risk
that the conversation would go nowhere.

The board decided to allow management to go ahead with its plan to split the company,
reasoning that they would rather try to control their own destiny than deal with a long-running
“war of attrition” from shareholders who wanted to see the US soft drinks brands sold. “The risk
of separation was that someone might come along and seek to buy Cadbury Schweppes,” says
Carr, who had joined the Cadbury board in 2001 and became its deputy chairman and senior
independent director in May 2003. “But the risk of staying as you were was to run the business
inappropriately [by not maximising value for shareholders]. And boards can’t do that.”

In early 2007, Cadbury Schweppes started discussions with private equity firms over a possible
sale of the US drinks brands. Its timing could not have been worse. In August, the years of cheap
borrowing that had funded ever larger deals came to an abrupt halt – the first hints of the credit
crunch that would precede a global financial crisis. Suddenly, private equity companies were
struggling to raise the money they needed to pay for the business. And without that cash,
Cadbury’s hopes of pulling off a big acquisition of its own looked forlorn.

The management did not completely abandon hope of selling the US drinks brands, but they
started planning to separate confectionery and drinks into two companies and then to list the
drinks business on the US stock market, issuing existing investors with shares in the newly
formed Dr Pepper Snapple Group. As the credit crunch intensified and it became clear that a sale
was impossible, the demerger went ahead in mid-2008.

Cadbury dropped “Schweppes” from its name, and told investors it would “flourish” as an
independent company – and thereby the world’s leading pure-play confectionery group. But its
hold on that title was short-lived. In April 2008, just as shares in the new drinks company were to
start trading in New York, Mars announced that it had agreed to buy Wrigley for £11.5bn
($23bn). Cadbury had been eclipsed.

...

At Kraft’s headquarters in Illinois, Irene Rosenfeld was watching developments in the

confectionery world with keen interest. When Rosenfeld became chief executive of Kraft in June
2006, she immediately began trying to boost the company’s sluggish growth with a series of
disposals and acquisitions. She sold Post Cereals, as Peltz had urged, and bought the LU biscuit
brand from France’s Danone. She then turned her attention to confectionery. Kraft had been
interested in Cadbury’s sweets brands for some time but as long as the UK company owned soft
drinks as well, it was too big and unwieldy for Kraft to consider buying. Now, in 2008, things
were changing. Although the demerger had fuelled press speculation that Cadbury had made
itself a takeover target – because it was now a nice, simple business ripe for sale – its executives
were too busy getting their house in order to worry much about potential suitors.
In July 2008, Carr had replaced Sunderland as Cadbury’s chairman, and was pushing
management to meet a tough new set of financial goals, including lifting profit margins into the
“mid teens” by 2011 from around 10 per cent in 2007. The company was also undergoing
extensive restructuring, closing factories and cutting jobs, as well as moving out of its
headquarters in Berkeley Square in 2008 to cheaper office space near Heathrow. All the while,
Peltz remained on the scene. He kept up the pressure on Cadbury, demanding that Colin Day,
finance director of Reckitt Benckiser, a high-performing British household products company, be
invited to join the board (Day became a board member in December 2008).

Carr, meanwhile, was under pressure to prove himself at Cadbury. A well-known businessman
with a reputation as a tough negotiator, Carr had helped to build the engineering group Williams
Holdings into a conglomerate specialising in fire protection and security, with a series of deals
during the 1980s and 1990s, and then broke it up in 2000. But his reputation was coming under
pressure due to difficulties in his job at pub operator Mitchells & Butlers, the company where he
had been chairman since 2003. M&B had lost hundreds of millions of pounds on hedges related
to property investments, its finance director had left, and some investors were calling for a
deeper boardroom overhaul. (Carr stepped down as chairman of M&B in mid-2008.)

As Carr and Stitzer worked on improving Cadbury’s financial performance, Rosenfeld spotted an
opportunity. She left Carr a message on his mobile in late August 2009, requesting a meeting.
When the two met in central London on August 28, she made an unexpected proposal: Kraft
wanted to buy Cadbury and was prepared to offer around £10.2bn or 745p a share in cash and
stock – 31 per cent more than Cadbury’s share price a few days earlier. Carr rejected the offer
without consulting Cadbury shareholders because he thought it was too low to take seriously.
Ten days later, Rosenfeld went public with her proposal.

Peltz, who still owned shares in Cadbury, didn’t know that Kraft was planning on making a bid
for Cadbury, but he was not unhappy when he heard about it. To force Kraft’s hand – because
Rosenfeld’s proposal did not constitute a formal offer for Cadbury – the British company’s
management asked the Takeover Panel to issue a “put up or shut up ruling”. Kraft “put up”,
going direct to Cadbury’s shareholders with a formal offer, and in effect turning its negotiations
with Cadbury into a hostile bid.

As the 60-day timetable that governs takeovers in the UK got under way, Carr led an
independence campaign for Cadbury, telling shareholders not to let Kraft “steal” their company
and urging them to reject this offer from a conglomerate with an “unappealing” business model.
He claimed Cadbury could deliver more value for shareholders if it stayed independent. Carr
refused to pander to nationalistic sentiments in his takeover defence, maintaining that he was
committed to shareholder value. But the potential loss of one of Britain’s most famous brands to
an American predator sparked concern in political circles, with business secretary Peter
Mandelson warning Kraft in December that it would face opposition from the government as
well as the local population if it intended to make “a fast buck”. But the government did not take
any action to prevent the bid, or secure commitments from Kraft to protect British factories or
jobs. As the bid proceeded, increasing numbers of Cadbury’s shares changed hands, as
traditional investors sold and hedge funds bought them in order to take bets on whether Kraft
would succeed.
At times during the takeover process, it looked as if Cadbury had a real chance of seeing off
Kraft. Its share price hovered around 800p – well above the value of Kraft’s initial offer – while
Rosenfeld was criticised by her largest shareholder, billionaire investor Warren Buffett. Buffett
made a public statement suggesting Kraft was using too many of its undervalued shares to buy
Cadbury (Kraft’s initial offer was 60 per cent stock and 40 per cent cash) and that he wouldn’t
vote in favour of Kraft’s proposal. He wasn’t against the idea of Kraft buying Cadbury, he just
didn’t like the way Rosenfeld was going about it.

But when Kraft eventually raised its offer to 850p in late January 2010, and switched the stock-
cash ratio it was offering to 40 per cent stock and 60 per cent cash, Cadbury’s board did an about
turn and agreed to recommend the offer to its shareholders. So it was, that in the early hours of
January 19 2010, Cadbury’s 186 years of independence came to an end.

...

When Cadbury employees woke that morning to newspaper headlines announcing the impending
sale of their employer, many were surprised and angry. Some descendants of Cadbury’s founders
were, too. They claimed that hedge funds and other short-term investors – which owned close to
one-third of the company’s stock as the bid battle drew to a close, up from just 5 per cent before
Kraft went public with its offer in September 2009 – had sold Cadbury out.

Institutional investors, meanwhile, were concerned that Cadbury had given in too easily.
Cadbury’s second-largest shareholder, Legal & General, issued a statement saying the final price
did not “fully reflect the long-term value of the company” and that it was “disappointed”
management had recommended the offer for an “iconic and unique British company”.

Some bankers involved in advising prospective counter-bidders for Cadbury claimed Cadbury’s
board made no serious attempt to get an auction going for the company. Hershey and the family-
run Italian group Ferrero seriously considered teaming up to try and trump Kraft’s offer,
although they never came forward with a formal bid of their own. Akeel Sachak, global head of
consumer banking at Rothschild and Ferrero’s financial adviser, says: “There is no doubt in my
mind that Ferrero had the appetite and capacity to deliver with Hershey an offer that would have
brought more value to Cadbury than Kraft’s offer. But they were defeated by the vagaries of UK
public bid rules and the decision-making tempo of a deeply private family [the Ferrero owners]
unfamiliar with public mergers and acquisitions.”

Carr, for his part, points out that Ferrero and Hershey never put a serious counter-offer on the
table, and argues that he obtained the best price possible for Cadbury in the circumstances. He
believes that hedge funds would have sold their shares to Kraft at 830p and that only by
negotiating with Rosenfeld had the company got as much as 850p. “Independence as an option
had gone,” he says. “The cause was lost … the decision then was to negotiate for what I and the
board felt was the recommendable price.”

He claims the company’s Achilles heel was the large proportion of hedge funds on its
shareholder register, as well as a historic lack of interest from UK institutions in the stock (in
September 2009, UK institutions owned around 28 per cent of Cadbury while US institutions –
less worried than their British counterparts about Cadbury falling to an American rival – owned
nearly half of the stock). “The seeds of destruction for this company lay in its [shareholder]
register,” Carr says. “If you’ve only got 28 per cent long domestic funds owning this company,
then you know that in a bid the rest are likely to sell.”

Carr says British regulators should consider changes to the country’s takeover rules to lift the
acceptance threshold to 60 per cent (from 50 per cent today) so that long-term shareholders may
have a larger sway in a bid situation. Sunderland is of a similar opinion. “I am a free trader but
[the Cadbury takeover] has made me think deeply about this issue,” he says. “The Takeover
Code was written at a time when the ownership model was very different and when a hostile bid
didn’t automatically land one-third of the register in the hands of arbitrageurs ... we need to think
about making the British market a little less open, a little less permissive.”

Still, neither government nor Britain’s opposition Conservative party has yet set out formal
proposals to change the takeover rules. It is not yet certain whether Cadbury will prove to be
some kind of tipping point following a long line of foreign takeovers of British companies,
including steel group Corus, airports operator BAA and chemicals group ICI.

Meanwhile, hedge funds take umbrage at the idea that they are to blame for Cadbury’s sale.
“We’re kind of an easy target,” says one US-based hedge fund manager who bought shares in
Cadbury during the takeover bid, pointing out that institutional investors also decided to sell their
shares to Kraft. “Institutions aren’t in the business of losing money either.”

Other investors agree that Cadbury’s takeover is not the fault of hedge funds. David Herro, chief
investment officer at US group Harris Associates, says: “The reason Cadbury was sold was that
it was under-managed … Good, well-run companies don’t just get taken out like that.”

...

Investors say that while Cadbury’s management was good at making deals, it was less skilled at
running the business day to day. “There’s a difference between strategic management and
operational management,” says one former Cadbury investor based in the US, noting that the
company seemed constantly to be taking charges for restructuring. “They were good at the
former and not at the latter.”

Some say that if Cadbury had been better managed and more profitable – like Reckitt Benckiser,
for instance – its stock price would have been higher, and it might have been too expensive for
Kraft. People close to Kraft say the US food group would probably not have been able to afford
900p a share. Investors add that over the years Cadbury had disappointed its shareholders too
often, so that even when its business started improving in 2008 and 2009, institutions were wary
about placing much faith in its management. As a result, they were reluctant to buy the stock.
“Investors have long memories,” says one fund manager. “They just couldn’t think that Cadbury
was changing so they were unwilling to believe what the management team was saying.”

Investors were particularly aggrieved by the company’s failure to tell them that it was thinking of
selling its US drinks arm in 2006. Julian Hardwick, a financial analyst at the Royal Bank of
Scotland, says: “A lot of people did feel that Cadbury had not communicated the way their
thinking had evolved ... that damaged management credibility.”

Hardwick agrees that if Cadbury had found a way to improve its profits earlier, it would have
been less vulnerable to a takeover. “The tragedy was that it all happened too late,” he says. “In
an ideal world they would have made faster progress ... and they would have commanded an
earnings multiple that would have made them more impregnable to someone like Kraft.”

Few people in the UK are happy that Cadbury ended up being sold to Kraft. Even Peltz believes
there is a risk the company’s much-loved brands will not get the attention they deserve in a big
food company that sells everything from instant coffee to hot dogs. “That’s a justifiable
concern,” he says, adding that Kraft will however be successful if it makes confectionery and
snacks the most important part of its business. “That’s what they will be judged on.”

Stitzer, who resigned as chief executive a few days after Kraft sealed its deal, says: “I spent 27
years of my life at this company, I absolutely love what it stands for and what it has done ... the
whole idea that ‘doing good is good for business’, the intersection of principled capitalism, and
commercial and financial performance, is what drives people at this company. They actually
believe that not only are they great confectionery marketers or sellers or manufacturers but that it
means something because the Cadbury Cocoa Partnership is investing in underdeveloped
farming areas or because the chocolates have been certified by Fairtrade.”

Carr says he feels a sense of sadness for “the loss of a business that was sound and the
independence of something that was good”. “If the company had done a number of things earlier,
then you wouldn’t have had the criticism from activist investors and you may not have had the
relative disinterest from UK institutions in owning Cadbury.” Still, he maintains there is no point
being nostalgic, despite Britain’s loss of household brands such as Roses chocolates and
Bournville cocoa. “It hadn’t been a family company for 50 years, it hadn’t had a member of the
family working in it for a decade. Fifty per cent of the company was purchased from an
American drug company – it simply wasn’t the business people believed it to be.”