After months of public wrangling, Kraft has agreed terms with Cadbury’s directors for a takeover of the British chocolate company.
The news will be a relief to City managers who’d been ‘forced’ to sample Cadbury’s Caramel and Dairy Milk bars to assess the correct price for their shares.
“820p!” cried Mike ‘Tubster’ Smugbottom, who runs the Saturn Consumer Contrition fund, as he swallowed Curly Wurlys like a puffin guzzling sand eels.
“No” *gmmf* “way!”, gulped hedge fund manager John ‘Two Belts’ Bainbridge, who hadn’t eaten this many Roses since his father gave him five tins at Christmas for exhorting £200 from a weak boy across the street to whom he’d sold a broken bicycle. “This stuff is the shizzle!”
Such fun and games are over, for imaginative writers and investors alike – but there is a more serious ramification arising from the takeover of this 200-year old British legend.
First, the formalities.
The BBC’s Robert Peston got the scoop on the Cadbury deal [1]:
After a six month battle, Cadbury’s board has – in fraught negotiating overnight – accepted a bid price of 840p per share, valuing the business at £11.5bn.
This will consist of 500p in cash – meaning that Kraft is borrowing around £7bn to finance the deal – and the rest in Kraft shares.
Cadbury shareholders will also receive a dividend of 10p.
On the face of it, 850p is a good result for any lucky punter who bought Cadbury shares before the bid, as the following graph shows:
[2]Cadbury's shares are up over 40% over the past 12 months (Click to enlarge)
As the jump up in price at the time of the bid demonstrates, the stock market was undervaluing Cadbury when Kraft made its move. The shares went from just under 600p to nearly 800p in an instant, before jockeying around to 837p.
But while short-term traders who took a punt on Cadbury in the middle of summer have done well, longer term investors may be annoyed.
Here’s Cadbury’s share price versus the FTSE 100 since 2004:
[3]Cadbury's outpaced the FTSE 100 in all but the bubbliest periods (Click to enlarge)
What this graph shows is that through most of the strong bull market years of 2004-2007 and the bear market that followed, Cadbury more than kept pace with the FTSE 100 – despite not being a miner or a bank or any of the other volatile stocks seen as the go-go investments in those years.
Throughout it paid a reasonable dividend, too.
The public data providers only show Cadbury’s data going back to 2004, due to the demerger from Cadbury’s Schweppes I presume.
But longer term Cadbury’s record would be even better [4], according to one of the more thoughtful managers in the London market:
Nick Train said durable brands like Cadbury remained undervalued by investors, “who seem to regard reliability as boring” and their steady growth as “little better than a symptom of corporate complacency”.
However, he noted Cadbury had outperformed the FTSE All-Share over one, three, 10 and 20 years prior to Kraft’s first bid for it during the six-month period under review to the end of September.
“In other words,” he said, “Cadbury stock, despite widespread apathy, had delivered to investors that most rare and valuable commodity – long-term outperformance of a ruthlessly efficient stock market – and then attracted a merger proposal that immediately put 40 per cent on its price.”
I agree, and that’s the reason why UK investors should mourn the passing of Cadbury.
Not because of its history, or because of those saucy adverts with the lady and a flake bar, but because such companies are rare indeed on the UK market.
They don’t make many companies like Cadbury
Kraft’s takeover of Cadbury is bad news for anyone British who wants to invest like Warren Buffett [5] (or at least the folkie Buffett of public imagination).
Study the stocks Warren buys and it’s big consumer brands like American Express and Coca-Cola that stand out.
Buffett buys such stocks when the price is depressed, and holds them forever – which he can plan to do because such companies are among the most predictable of all (still inherently unpredictable) investments.
The US has quite a few such stocks, but there are a dearth in the UK.
Diageo, the global drink giant, is one, maybe Unilever is a second, and Tesco is arguably another. (Buffett is an owner, which is no coincidence). If you’re happy to invest in cigarette companies that rely on poor countries for growth then there are the tobacco stocks, but personally I avoid them.
A few years ago the banks looked both big and stable, but we all know what happened then. The drugs companies Astra and Glaxo ought to figure, but their performance doesn’t exactly inspire confidence (though I hold both).
If you’re investing in a UK index tracker [6] this probably doesn’t matter – the UK market had done only a little worse than its international rivals over the past couple of decades last time I looked, and that could easily just be noise.
But if you want to buy stocks like Buffett, you’re either forced down the ranks to middling companies like pie shop Greggs, or you need to buy overseas stocks [7], which is more complicated and introduces currency risk [8].
Cadbury was a great UK investment but it’s been gobbled up by a predator who appreciates its value.
Suddenly I don’t feel so hungry anymore.