Kraft-Cadbury Takeover Failure Would Test CEO Pledges

Jan. 8 (Bloomberg) -- Kraft Foods Inc. Chief Executive Officer Irene Rosenfeld and Cadbury Plc CEO Todd Stitzer disagree on the merits of merging their companies. They’ll both need to prove themselves if the deal falls through.

Rosenfeld is in her fifth month of pursuing a 10.9 billion- pound ($17 billion) hostile takeover offer, which Cadbury has rejected as “derisory.” Stitzer has predicted increased growth as an independent company. Rosenfeld says Kraft can achieve “top-tier” performance regardless of the outcome.

“If this Cadbury deal does not happen, I think she’s certainly lost some credibility,” Christopher Growe, an analyst at Stifel Nicolaus & Co. in St. Louis, said in a phone interview. “She’s going to be held to a very high standard.”

Reputations are at stake for the CEOs, Americans who are a year apart in age and have more than 50 years of combined experience in the food and beverage industry. This week, Kraft shareholder Warren Buffett said Rosenfeld, 56, won’t get a “blank check” for a bid and asked investors to oppose a plan to issue as many as 370 million shares. Stitzer, 57, has seen Cadbury stock surge to a high of 814 pence on Kraft’s proposal and later pare gains to within a few pence of the offer.

“Leadership is probably more difficult than it’s ever been,” said Kevin Kelly, CEO of Heidrick & Struggles International Inc., a Chicago-based executive search firm. “When something distracts from managing and engaging with your employees and clients, it’s tough.”


‘Hot Seat’


Buffett is telling Rosenfeld she “can’t just start printing stock,” and warning her that Northfield, Illinois- based Kraft may have to walk away from the deal if another bidder enters, said Sachin Shah, a special situations and merger arbitrage strategist at Capstone Global Markets LLC in New York.

“Rosenfeld is surely on the hot seat, especially with Buffett,” Shah said. “He has put a ceiling on the total consideration Rosenfeld may want to offer Cadbury to complete a deal.”

Stitzer’s risk differs. If the deal goes through, he loses control of the Uxbridge, U.K.-based company he joined in 1983.

“In the last couple of years he’s done an excellent job,” said Jon Cox, an analyst at Kepler Capital Markets in Zurich. “Now he’s in a win-win situation whatever happens; if Kraft walks, he remains CEO, if Kraft takes over, he and his team will get paid handsomely to walk the plank.”


Athletic Abilities


The fight has been a marathon. Stitzer embarked on a week- long blitz in London and New York in December to persuade Cadbury shareholders not to accept Kraft’s cash-and-stock offer, then worth about 733 pence a share. Rosenfeld traveled to London to meet with investors shortly after the bid became public and said on a November earnings call that Kraft is well positioned for “top-tier performance” with or without Cadbury. She is scheduled to participate in a panel on food security at the World Economic Forum in Davos, Switzerland, this month.

Both CEOs have honed their competitive skills as athletes. Rosenfeld, who is also Kraft’s chairman, played four varsity sports in high school and chose Cornell University as her alma mater partly because of the women’s athletic program. Stitzer, who has dual U.S. and U.K. citizenship, paid for law school at Columbia University by playing professional tennis. Neither was available for an interview.

Since Rosenfeld approached Cadbury in August to discuss a takeover, she has resisted raising her price in the face of Stitzer’s snub and investor demands for more. A Cadbury purchase would create a company with about $50 billion in annual revenue.


‘Centered and Focused’


“Irene Rosenfeld is terrifically centered and focused,” Ali Malekzadeh, dean of Xavier University’s Williams College of Business in Cincinnati, said in a phone interview. “She doesn’t do irrational things and, I think right now, she is in a bind.”

“Her credibility is on the line in this process. She’s one of the best-known CEOs we have, and she has played out her hand,” Malekzadeh said.

Kraft, which traded at about $31 when Rosenfeld was named CEO in 2006, rose 3 cents to $28.93 at 4:15 p.m. on the New York Stock Exchange. Revenue has dropped for the past three quarters. Cadbury advanced 1.5 pence to 778 pence in London. That compares with the cash-and-stock offer of 767 pence, based on Kraft’s closing share price.

As part of its defense, Cadbury projected its most ambitious performance targets to date. The operating margin will reach as much as 18 percent by end-2013 and so-called organic sales growth will accelerate to as much as 7 percent annually over the next four years, driven by emerging markets such as India and Latin America, the company said in December. If a deal falls through, investors will expect management to deliver, said Nicolas Ceron, an analyst at Numis Securities Ltd. in London.

“That pressure will be huge,” Ceron said. Achieving that kind of sales growth is “not impossible, but in the current climate it’s extremely demanding.”


Hershey Hookup?


While rebuffing Kraft, Cadbury executives have spoken more favorably about combining with Hershey Co., the company’s U.S. distributor. Stitzer told investors in New York on Dec. 18 that a combination with Hershey would boost earnings per share more than a Kraft deal, even though Kraft would present more cost- cutting opportunities, according to people who heard the statement.

On Dec. 14, Stitzer told investors he wasn’t worried about a shareholder backlash if Kraft, or any other bidder, walked away from the U.K. company. He also said the company had been approached by rival suitors. He didn’t name any.

Hershey has “an excellent position in chocolate, a strong route to market and great heritage,” Stitzer said in an interview in the Daily Mail Dec. 23.

Hershey, based in the Pennsylvania town of the same name, dropped 11 cents to $36.38 in New York trading.


Legal Training


Stitzer engineered more than 40 transactions after joining Cadbury Plc as a Columbia-trained mergers and acquisitions lawyer. In 2003, the Pennsylvania-raised CEO outbid Nestle SA for chewing-gum maker Adams Inc., making Cadbury the world’s biggest confectioner. The U.K. candy maker held that rank until it was displaced by Mars Inc.’s $22.6 billion purchase of Wm Wrigley Jr. Co. in 2008.

Rosenfeld spent more than 25 years at Kraft, with a two- year interruption in 2004 to run PepsiCo Inc.’s Frito-Lay snack- food unit. Last year, Forbes magazine ranked her No. 6 on its list of the world’s most powerful women, three behind PepsiCo CEO Indra Nooyi.

“Irene has more to lose than Todd if the deal doesn’t go through, but I think it will,” said Kepler’s Cox. “She’s a very canny operator.