Buffett Potential Kraft-Cadbury Roadblock (BRK-A, KFT, CBY)

Berkshire Hathaway Inc. (NYSE: BRK-A) has made one of its more unusual press releases.  The company said that it has voted “no” on Kraft’s proposal to authorize the issuance of up to 370 million shares to facilitate the acquisition of Cadbury.  This is on the heels of Kraft Foods Inc. (NYSE: KFT) paying more to acquire Cadbury plc (NYSE: CBY).

Berkshire is Kraft’s largest holder and the company’s release said that Berkshire believes that the share-issuance proposal would 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. Furthermore, it said, “And we worry very much that, indeed, there will be an additional change from the revision announced this morning…. a shareholder voting “yes” today is authorizing a huge transaction without knowing its cost or the means of payment.”

Berkshire is calling Kraft’s common stock a very expensive currency considering that it is undervalued. It pointed out that Kraft spent $3.6 billion in 2007 to repurchase shares at about $33.00 per share (versus $27 today), presumably because the directors and management thought the shares to be worth more.

Berkshire asks, “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?”

Kraft must announce its final offer for Cadbury by January 19th, and Berkshire-s press release states: “If we conclude at that point that the offer does not destroy value for Kraft shareholders, we will change our vote to ‘yes’,” but it currently believes that no shareholder should give a “yes” vote until it is known what the vote is actually for.

This is a vote against the new terms, but this does not actually mean that Berkshire Hathaway plans to try to kill the deal.  Buffett had already said it was a full price, and this is the first formal action taken by the Oracle of Omaha.

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Jon C. Ogg
January 5, 2010