Ever since Todd Stitzer, chief executive of Cadbury, demerged the group’s
drinks business last year, he has done everything he can to become the
City’s investor pin-up. He has followed the rule book, turning it into a
focused company with international reach and an exposure to emerging
markets.
Huge costs have been taken out over the past two years, including 7,500
redundancies. Stitzer has also avoided the elephant trap of overloading the
balance sheet with debt.
The one thing he has failed to do during this journey is convince the City to
put a higher stock market rating on his shares, to a level that would put it
out of the reach of an opportunistic bidder. This is the single reason why
the company found itself on the receiving end of a £10 billion bid from
Kraft, America’s biggest food group, last week. Against its international
peers, Cadbury had looked undervalued, so much so that it allowed Kraft to
offer a 40% premium to the pre-bid closing price. And still analysts are
saying it is cheap.
Stitzer could have achieved a higher rating by moving the firm’s domicile to
America, a country that traditionally puts higher valuations on quoted
companies and where the firm already has a big investor base. But he knows
the deep Quaker roots that Cadbury has in the UK would rule this out.
This is now Stitzer’s chance to sell his story. He has to convince investors
he can achieve his ambition of growing margins to 15% by 2011 and that,
combined with bolt-on acquisitions, revenues can also be lifted to boost the
share price. At the current bid price of 745p (although the price is lower
when last week’s rise of sterling is taken into account) that is not a hard
job. The market thinks the same way and Cadbury’s price closed the week at
775½p.
However, if Kraft starts to move its bid price towards 850p a share, then it
will be down to Stitzer’s salesmanship and the appetite of investors. They
know that if they reject an offer it would see Cadbury’s shares drift down
to 600p and not recover for 18 months.
I had dinner with Stitzer on Thursday night. He believes he can do it and he
has a road map to show the growth opportunities over the next five years. He
is not interested in any short-term gimmicks to “goose” the share price.
Instead he believes in long-term value generation. He says one way of killing
that value is for Kraft to start pushing its own products down Cadbury’s
international pipeline, turning the company into an unwieldy food
conglomerate, an argument Irene Rosenfeld, the combative, roller-blading
chief executive of Kraft, rejects.
There is a price Cadbury will go for, but Kraft is not there yet. There are
other cash-rich funds out there and Unilever and PepsiCo will be taking a
look. Cadbury is now as much of a play on the emerging-market economies as
it is on mature western markets. In India it is starting to sell
slow-melting chocolate balls as fast as they can make them, and in Mexico
and Brazil they are learning to chew as much gum as the Americans.
But don’t write off Kraft. Despite earlier doubts, US banks are falling over
themselves to lend cash to finance the offer. Rosenfeld has a track record
of investing through hard times. She wants Cadbury and has identified enough
big synergies in processes, technology and global distribution to build a
food powerhouse. She will not buy at any price, though. She has rebuilt
Kraft over the past three years and has no intention of squandering those
gains.
This is going to be a long game. For investors, the spotlight will focus on
Cadbury’s value proposition measured against the value of Kraft shares — it
is financing 60% of its bid by paper — and its cash. If Kraft raises its
offer, the value of that paper currency will become increasingly important.
Kraft and Cadbury will take this battle to their investors and that is where
the final decision will ultimately rest.
Two-faced Blankfein
How can anyone who has taken out £106m in pay and bonuses over the past four
years moralise on the excesses of the investment-banking industry? This is
what Lloyd Blankfein — chairman of Goldman Sachs and one of the biggest
credit-boom beneficiaries — attempted to do last week at a conference in
Frankfurt.
Blankfein admitted that banks lost control of the exotic products they sold
during the credit boom. What he failed to point out was that a large part of
Goldman’s huge bonuses during those years came from taking advantage of
those banks where the control systems had broken down. They were the
counter-parties to deals that made Goldman’s millions.
Nobody at Goldman raised the alarm when the boom was in full flow. And let’s
not forget Goldman itself was hugely exposed to America’s AIG. If the
insurance firm had not been rescued by the US Treasury the consequences
could have been dire.
Blankfein’s self-serving speech was a politically calculated move ahead of the
G20, designed to reassure world leaders that the bank sector could police
itself without regulation. It is a cynical attempt to show that if one of
Wall Street’s biggest players can break rank and agree the industry must
change its ways, then it might serve to mitigate the onslaught of regulation
it now faces.
Blankfein is not the right man to project the human face of Wall Street. Leave
it to someone like Stephen Green, chairman of HSBC, who for years has given
his bonus to charity without seeking publicity.
The ability of Goldman and Blankfein to make money is not in question — but
their attempt to take the moral high ground is. You can’t trouser that kind
of money then turn gamekeeper and tell the world it can’t be done in the
future.
Goldman is a Wall Street cannibal. It will eat anything for profit and has
made more money for its partners than any other investment bank. Now
Blankfein is saying that in future banks should be able to claw back past
compensation so as to avoid excessive risk taking. It’s a bit late for that.
Goldman’s top brass pocketed the cash long before the alarm went off.
Blankfein said the controversy and anger over the size of bankers’ pay is
understandable and appropriate and called for multi-year contracts to be
banned. Wall Street and the City need to change the way they reward traders.
That much we all agree on. But don’t leave it to Blankfein. When your
company has amassed huge bonus accruals amounting to billions of dollars in
the first half of this year and you have personally made over £100m from the
excesses of Wall Street you are in no position to objectively regulate on
its future.
Directors’ mettle
This weekend we launch our non-executive of the year contest in association
with KBC Peel Hunt. Now in its fourth year, it is designed to identify board
directors who have had a big impact on a company. The event has grown in
stature each year and this time there are five different categories.
In the past 12 months, the role of a non-executive has been tested to a level
not seen for decades. It has shown how hard-earned reputations can be easily
lost. As a result, it should show up some interesting candidates who have
risen to huge challenges to guide companies through the financial mayhem.
To enter visit nedawards.co.uk.
john.waples@sunday-times.co.uk
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