After months of wrangling between Kraft and Cadbury's, it looks almost certain now that another iconic British brand will fall into the hands of foreign buyers.
After months of wrangling over price, thinly veiled political intervention and the continued enrichment of investment bankers, it looks almost certain now that the ownership of another iconic British brand will fall into the hands of foreign buyers.
Kraft and Cadbury have agreed on a value of £11.5bn – or 840p a share – for the British company, a number that is likely to please most shareholders given that only four months ago Cadbury’s shares were trading at 568p.
On the one hand, this is no different from the hundreds of mergers and acquisitions that take place around the world every year. Some turn out well, but many do not – and in the latter case the management and shareholders of the merging companies usually suffer.
The outlook for Kraft and Cadbury is an uncertain one, with trends to consolidation in the industry alongside complimentary market positions potentially offset by high integration costs and a clash of business and operational cultures (and our chocolate may start to taste of cheap cheese!).
But these are all matters for shareholders. So should the progressive Left even have a view on deals like this, and does policy have a role to play? The answer is unequivocally yes. The financial crisis has demonstrated that in the event of a significant corporate failure, governments – and ultimately taxpayers – find themselves under pressure to provide financial support potentially running into tens of billions of pounds; and the resulting unemployment, often concentrated in particular towns and cities, places enormous strain on social security and public services.
The crucial point is that transactions in the private sector do not occur in a vacuum, and it is usually when things take a turn for the worse that the broader societal impact becomes clear, but as we operate in what is primarily a market economy, it is difficult, and perhaps even undesirable, for a government to intervene on purely commercial grounds.
Further bluntly “protecting” jobs by seeking guarantees from a buyer is not a particularly progressive policy – it ignores the forces of competition and globalisation that all companies, UK owned or otherwise, face. Indeed, Cadbury itself has a record of aggressive cost-cutting.
The biggest risk to Cadbury workers is not that Kraft is an American company that will seek out profits at the expense of British jobs, it is that Kraft is funding the acquisition with £7bn of debt, taking the group’s debt to EBITDA (Earnings before interest, taxes, depreciation and amortization – a measure of earnings) ratio to nearly four times.
The cost of financing the massive mountain of leverage means that much of the cash generated by the business will be spent not on investment and training, but on interest payments. And if rates rise or sales drop, the group will be forced to cut jobs – and at worst may even fail.
Therefore the right approach is to enact public policy that demands financial prudence as part of any deal, domestic or cross-border. This could simply be a cap on the amount of leverage a buyer of a British business can apply. Just as we should probably have stopped Northern Rock lending 125 per cent of the value of someone’s home, we should stop companies picking up British businesses when there is a risk that the terms of the acquisition could lead to job losses.
This is not the government trying to second guess what best represents shareholder value. It is the government protecting its, and our, interests.
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12 Responses to “Cadbury and Kraft – public policy should focus on debt, not nationality”
Web links for 20th January 2010 | ToUChstone blog: A public policy blog from the TUC
[…] Cadbury and Kraft – public policy should focus on debt, not nationality Varun Chandra writes on Left Foot Forward that Kraft's heavily leveraged buyout bodes badly for the Cadbury's business in the UK: "The cost of financing the massive mountain of leverage means that much of the cash generated by the business will be spent not on investment and training, but on interest payments." Related posts (automatically generated):Cadbury deal shows little or nothing has been learnedPre-Budget Report LIVE: Online coverage from noonLet’s talk PBR – live coverage this Wednesday […]
Liz McShane
Mark – there was guy from HSBC markets on Newsnight the other night saying that he thought all those credit rating agencies – Fitch, S&P, Moody etc were a load of rubbish and that the ratings were meaningless….