Thursday, 21 January 2010

Warren Declines Chocolate Buffett

Suddenly Cadbury gets interesting. News overnight from the states is that Kraft's biggest shareholder has come out against the deal. That's relatively serious for the Kraft management team in any situation, but when that shareholder is none other than the great Warren Buffett, CEO of investment vehicle, Berkshire Hathaway, then it's potentially catastrophic.

Buffett told CNBC. “I think it’s a bad deal. I have a lot of doubts." He continued: "“Irene [Rosenfeld CEO of Kraft] has done a good job in operations, I like Irene. 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.”

When Buffett talks the markets listen, probably more so than to any other individual, including the Chairman of the Federal Reserve. Although Buffett may still live humbly (in a three-bedroom house in Omaha Nebraska apparently) the man known as the 'Oracle of Omaha' is ranked second only to Bill Gates in terms of wealth (he gave most of it away to Bill and Melinda's charitable foundation a few years ago). Berkshire Hathaway now holds significant or controlling interests in some of America's biggest companies, including the Washington Post Company, American Express, Gillette, Coca Cola, Wells Fargo and Moody's.

And, crucially, he is not afraid to wield his influence. Ten years ago he scuttled Coca Cola's bid for Quaker Oats because of the soft drink maker’s proposal to fund the deal with stock, much in the same way that Kraft proposes to fund Cadbury.

Effectively the Kraft management team now has the world's most successful investor wielding a sword of damacles over its head. Buffett's problem, as I suspected yesterday, is price. Delivering value at 850p per share is a tough task no matter how talented the management team.

One to watch.


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