So Kraft captures the chocolate factory, as Cadbury accepts an improved £11.9bn offer from the US cheese maker. If you have shares in Cadbury, you get 500p cash + the rest in Kraft stock.
Cash is nice and simple. But what should you do with the latter?
Kraft boss Irene Rosenfeld is clearly feeling quite chipper, claiming that “we have increasing momentum in our business and are quite confident that the combination of these two companies will help us to build on that momentum and further accelerate our ability to deliver attractive returns.”
More or less what you’d expect. But though the deal creates the world’s number one confectioner, biggest isn’t always best.
Take a look at Kraft’s track record. When it was split off from Philip Morris in 2001, Kraft was the largest food manufacturer in the US and the second largest on the planet, with total sales of around $30bn. On the first day of trading, the stock price was $31.25.
Since then, Kraft has done its fair share of wheeling and dealing, including selling its sugar confectionery division to Wrigley in 2004 and buying Danone’s biscuit and cereal business for $7.2bn in 2007. By last year, turnover had risen to $42bn.
Trouble is, profits have gone the other way. Here’s a chart showing basic earnings per share before extraordinary items (Bloomberg calls it ‘EPS bef XO’). It’s down from almost $2 in 2002 to just over $1.20 in 2008.
Kraft shares are currently $28.75. In other words, apart from dividends – and to be fair, the payout has almost doubled since 2002 and gives a current yield of 4% – the stock price has dropped by 8% over 8½ years. That’s hardly a feast of shareholder value creation.
Maybe the cheese maker is right that Cadbury will provide the catalyst for its future growth. But do you want to take the risk? History is telling you to take the money, sell your new Kraft shares – and run.