Learn from Warren Buffett

Warren Buffett would vote against Kraft Foods Inc.’s takeover of Cadbury Plc. if given the chance because the foodmaker is overpaying, he told CNBC.

“I think it’s a bad deal,” he said on the business news network last Wednesday. “I have a lot of doubts.” Buffett is chairman of Kraft’s biggest shareholder, Berkshire Hathaway Inc.

Buffett urged investors in a January 5 statement to deny Kraft chief executive officer Irene Rosenfeld the permission she requested to issue as many as 370 million shares to fund the Cadbury bid. Kraft was worth more than the stock price suggested, Buffett said, calling the shares “very expensive currency.” Rosenfeld raised the cash portion of her bid and obviated the need for shareholder consent.

Buffett, whose takeovers and stock picks at Berkshire have won him world renown, helped scuttle Coca-Cola Co.’s bid for Quaker Oats 10 years ago because of the soft-drink maker’s proposal to fund the deal with stock. Buffett, who is a Coca-Cola investor, has said he prefers using cash for Berkshire takeovers, though he plans to issue stock to help fund the $26 billion deal for railroad Burlington Northern Santa Fe Corp.


The Kraft deal is valued at £11.9 billion (19.4 billion). Cadbury investors will get 840 pence a share, including 500 pence in cash and the rest in stock, Kraft said. Cadbury will also pay an additional 10-pence dividend once the offer is accepted by its holders. The revised bid is about 9 percent higher than Kraft’s previous bid of 769 pence, and consists of 40-percent stock and 60-percent cash.

“Kraft is still undervalued,” Buffett said. “I just don’t think it’s as undervalued as it was three weeks ago” because the company is issuing shares and divesting valuable assets, Buffett said.

Kraft said this month it would sell pizza brands including DiGiorno and Tombstone to Nestlé SA and use proceeds from the $3.7-billion deal to boost the cash component of its Cadbury bid.

Buffett said that he considers the pizza deal to be valued at $2.7 billion because of tax considerations. “Giving up a business that makes $280 million a year for $2.7 billion, I think that’s a mistake,” Buffett said. Kraft used an “enormously tax-inefficient way” for the sale.

Rosenfeld increased the original bid after Cadbury rejected it as “derisory” and Hershey Co. prepared to mount a rival offer. A purchase by Kraft displaces Mars Inc. as the world’s biggest candy maker, according to Euromonitor data. The takeover creates a company with about $50 billion in annual sales, adding Cadbury’s Creme Eggs and Trident gum to Kraft’s Oreo cookies.

“Irene has done a good job in operations, I like Irene,” Buffett told CNBC. “She has been very straightforward with me, we just disagree. She thinks it’s a good deal, and I think it’s a bad deal.”

Kraft believes the acquisition “transforms our portfolio for better long-term growth,” said Michael Mitchell, a spokesman for the Northfield, Illinois-based company, after Buffett’s comments. “We respect his opinion.” Trevor Datson, a spokesman for Uxbridge, England-based Cadbury, wasn’t immediately available for comment.