At first glance, it may seem that Cadbury and BAA have little in common. One is a long-established and much-loved chocolate manufacturer with a philanthropic heritage and the other is an airports company held in low regard by local residents, passengers, journalists and politicians. Bear with me, as they have more in common than you might think.
Both have recently gone through high-profile takeover battles with foreign bidders. BAA conceded to Gruppo Ferrovial in 2006, when the world’s biggest (British) airports company passed into Spanish hands. BAA’s board secured a very good deal for its shareholders and Ferrovial had to stump up a considerable premium to BAA’s regulated asset value, which has caused it headaches ever since.
Similarly, Cadbury’s board has tossed in the towel and conceded to US food giant Kraft. But the Cadbury board has recommended acceptance of a share price of £8.40 – a significant discount to its long-term share price, according to analysts and commentators. This is quite enough to turn a quick buck for the speculative US hedge funds who nipped in recently and mopped up a quarter of its shares. And UK pension funds and long-term investors will make a return, but not as much as they could have done had the company been valued closer to the £10 a share that analysts say it is worth. Its a bit of a steal for Kraft.
So far, so different. But here come the parallels – and the warning to Cadbury and its putative owner.
Both BAA’s new owners and Kraft had to borrow heavily to fund their bids. Ferrovial’s first act as owners was to load that debt onto their new acquisitions. Anyone who has the misfortune to support Manchester United understands that this saddles the company with high interest payments which have to be funded from somewhere, and if it isn’t from higher revenues, then it’s going to be from lower costs or by offloading some of the assets (or, more happily for the rest of us, by upsetting the natural order of things and keeping Man U off the top of the Premiership table).
Even before the UK’s competition authorities declared BAA’s London airports monopoly to be against the public interest and required break-up, economics had already forced BAA’s new owner to sell the recently-acquired Budapest Airport, flog its duty free business and to begin selling off its US interests. Gatwick was also sold in December 2009 in a process begun many months before the Competition Commission bared its teeth and made its sale compulsory. These sales were needed in a large part to finance the repayments of the £12 billion of debt with which Ferrovial has saddled BAA, which until this point had been cash rich and debt light.
Cadbury can expect the same medicine from a Kraft acquisition. Kraft is reportedly borrowing £7 billion to help finance the £11.5 billion deal, and this debt will be loaded onto Cadbury, not onto Kraft. So unless Kraft’s marketing genius can produce astonishing sales figures, there will be rationalisation, cost cutting and asset sales.
And Kraft has more leeway to cut and rationalise than Ferrovial did with BAA. Cadbury’s chocolate can be made anywhere that the recipe and ingredients can be shipped, so its manufacturing can be moved abroad, while BAA’s passengers flying to London can’t be diverted to Central Europe or to the parent company’s home market. Employees at Cadbury are in a much less secure position than BAA’s employees were after takeover, since for the most part, BAA’s jobs were not exportable.
And the impacts go beyond the financial. Before its takeover, BAA was consistently the most admired (privatised) transport company in Britain, having worked assiduously at tackling the environmental and social impacts of its operations. Of course a minority of local residents bore the brunt of the impact of the flying habits of the rest of us, and were naturally unenthusiastic about their concrete neighbour, but BAA was generally regarded as being at the forefront of sustainable development and social engagement, was largely liked by its national stakeholders and envied by its competitors abroad. Not any more. Since Ferrovial took the helm BAA has become the aviation equivalent of Railtrack – derided, disliked and dismissed – though to be fair, this can’t all be laid at the door of the new owners: the security chaos that swiftly followed the takeover was not of their making.
And what does this mean for Cadbury? Loss of independence, of Britishness, will mean a loss of natural empathy and support among decision-makers and customers (I’ve not knowingly bought a Rowntree’s product since it was taken over by Nestle in 1988). The loss of jobs through inevitable rationalisation and cost-cutting means union (and public) hostility and reputational damage. And the sale of, discontinuing or messing around with brands will further damage customer loyalty. All are problems for the new owner.
The global market economy means that takeovers like Cadbury and BAA will continue to happen, and major national companies will lose their independence to aggressive foreign buyers. But caveat emptor – there will be consequences for the buyer as well as the bought. It won’t necessarily be a Picnic and there may be thorns among the Roses.