Keynsham closure was inevitable when Cadbury hiked the price

The decision by Kraft to close the Cadbury factory at Keynsham has been met with moral outrage, but frankly it was inevitable at a price of 850p per share.

Admittedly, the Americans have been a little disingenuous. Keeping Keyhsham open was part of their opening part cash, part share offer designed to cosy up to the workforce, they just didn't withdraw the idea when the price went up.

850p per share has left Kraft having to look for big synergies and a plant which had already been earmarked for closure by the Cadbury management was the obvious fall guy.

Here-in lies the problem. The Cadbury management team have a duty to act in the best interests of shareholders, which meant getting the maximum amount of cash for the company. However, maximum cash is bad news for the workforce, because the new owners have to start looking for big savings.

What happens next? Well if I was a Cadbury employee I would be hoping that Kraft put some good numbers on the board when they next report. If not, all bets and all promises are off.

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.

Cream egg on our faces

I have hesitated to blog about Cadbury because, frankly, I haven't been able to think of anything original to say.

When I first heard of the Kraft bid my view was that this was a done deal as long as Kraft came up with the right number. For the City, sentimentality about saving a great British institution was never, ever likely to come into it. The stumbling block has been Kraft's initial part shares, part cash bid which was spurned by institutional investors and the Cadbury management.

The institutions are not fools, they know that most M&A actually destroys shareholder value. Also they would be investing in a US-listed company at at time when the US economy is, at best, in recovery. The message, loud and clear, was "if you want this company you are going to have pay cash, we want no part of the future."

Have Kraft paid too much? I'm not close enough to the business plans of either company to make that judgement but it is interesting that neither Hershey nor Nestle have come in as a White Knight to rescue Cadbury. What is certain is that Kraft will now have to extract some serious 'synergies' from this deal (for synergies read cost-cutting) in order to make it work.

There is another wider issue here. As I reflected on this last night I couldn't help but wonder what would have happened if the boot was on the other foot, if Cadbury had bid for Kraft or Hershey? When Dubai Ports tried to take over six port management operations in the US four years ago an unholy alliance of Conservative Republicans screaming "threat to national security" and trade union Democrats screaming "threat to jobs" defeated the deal in Congress. American legislators may not have been able to make the national security argument over chocolate, but you can bet they would have come up with some reason why it was in American interests to keep these companies in the homeland.

For that matter what would the French response have been if BPB had attempted to take over St Gobain instead of the other way round? The French have long taken a very protectionist view of foreign corporate raiders, famously declaring that yoghurt was a "strategic national asset" when a bid came in for Danone.

Contrast this with the UK where all of our listed companies have giant 'For Sale' signs hanging over them. It is precisely this situation which has led to many of our major energy generators, such as British Energy, being owned by the French or Germans. If that is not a threat to (energy) security then I don't know what is.

The question we now have to ask ourselves in this country is, how much longer are we willing to let major British companies be sold off because the City loves a deal?