Choc Wars End-Game Approaches. Cadbury can still see off Kraft and we still need new rules to limit takeovers.

Roger Carr, the chairman of Cadbury, viewed the results as "outstanding" and argued that these made "Kraft's offer even more unattractive today than it was when Kraft made its formal offer in December".

He went onto stress that it would require a "step-change" in the size of the offer to "make it competitive" and that "there is no strategic, operational or managerial reason why anyone should think that Kraft should own Cadbury". I would agree whole heartedly.

Carr also hit out this week at Irene Rosenfeld, Kraft's chief executive and chair, saying her shareholders had been forced to deal with "repeated disappointment from a management team who have promised much and delivered less". Ouch.

Kraft's tit-for-tat response was to raise its earnings guidance for 2009 from $1.97 to at least $2 a share, claiming that this "reflects strong operating gains as well as a significant increase in marketing investments versus the prior year".

Rosenfeld stated that: "We're delivering high-quality earnings growth, despite the difficult earnings environment ... We're well positioned to deliver sustainable top-tier performance, with or without Cadbury" (which suggests to me that they don't need Cadbury after all).

Yet Kraft didn't actually provide 2009 sales in this week's statement and has yet to set a date for releasing complete results. In November, Kraft said that organic net revenue, which excludes acquisitions, divestitures and currency effects, would rise by only 2% in 2009, down from a previous projection of 3%.

Cadbury shareholders might like to reflect on that if and when Kraft comes back with more cash. As I've said all along, Kraft needs Cadbury for growth - Cadbury doesn't need Kraft for anything.

Ferrero out, Hershey still poised to bid

Meanwhile, the Italian family-owned confectioner Ferrero this week indicated that it was not going to bid for Cadbury after considering either a straight bid or a tie-up with Hershey, banks and private equity investors.

This led to speculation that Hershey, which had been looking at a joint bid with Ferrero and private equity firm Blackstone, would be effectively ruled out from bidding as it would not be able to harness the financial firepower to mount a bid. Yet today it seems that Kraft is still in the running to mount a last-minute solo bid.

To do this, though, the firm faces a number of significant hurdles:
1. It needs to win approval from its controlling charity trust, which holds some 80% of Hershey's voting rights and which would determine the mix of any proposed cash and shares bid;
2. It needs to agree the terms of any financing package, rumoured to be with JPMorgan and Bank of America Merrill Lynch, that would allow Hershey to raise the cash it needs without damaging its investment-grade credit rating;
3. It needs to figure out what price it would have to offer to win Cadbury.

One possibility here is a sizeable (£760+ million) investment by the Hershey Trust in return for a bigger stake in the enlarged group. Hershey is also said to have recruited financier Byron Trott, who is thought to be close to major Kraft shareholder Warren Buffet, to seek other private equity backers for a deal.

Make no mistake, a Hershey takeover of Cadbury would be a better bet than Cadbury being swallowed up into the slow-growth vast conglomerate that is Kraft, but Cadbury remaining independent is still the best possible outcome for long-term committed shareholders and workers.

Like Kraft, one wonders how much debt Hershey would have to pile up to mount a takeover to pay-off Cadbury shareholders, debt that would then weigh on the new firm.

And it's not as is Cadbury needs to change its management. The firm has been performing brilliantly in tough trading conditions - somewhat in contrast to Kraft. Yet it is Kraft which has the offer on the table at this moment, and it is that offer which needs rejecting, in part because it makes little strategic sense anyway and also because of what might happen to jobs in the UK and further afield.

What about the Workers?

This week the Union Unite issued its own briefing to Cadbury investors. In a detailed and well constructed case, the union stressed that as many as 7,000 UK jobs could move abroad if Kraft acquires Cadbury. A further 20,000 jobs in the supply chain could be at risk if the hostile bid goes through, it says. These are not pie-in-sky figures and none of this should be a surprise - think about what happened after Kraft's takeover of Terry's Orange and Nestle's takeover of Rowntree. There were sizeable UK job losses when production was shifted abroad.

And, as I've pointed out above, post takeover Kraft would be saddled with debt. Unite calculate that the firm would in fact be saddled with a "colossal" £22 billion of debt.

Unite's concerns have been echoed by Cadbury's Chairman Roger Carr: "The issue looking forward for them is for Kraft to make this pay for their shareholders they have to extract large synergies... Synergies is a euphemism for heavy cost cuts and therefore inevitably plants and jobs would be lost."

Fine words are not enough, Lord Mandelson

It is this possible hollowing out of yet more UK manufacturing capacity (hardly what we need when the economy has been far too unbalanced towards financial rather than real engineering anyway) which has stimulated some interesting comments by Business Secretary Lord Mandelson.

Mandelson of course last month famously warned that Kraft would face strong opposition if the US firm was seeking to make a "fast buck" from Cadbury.

Fine words, but what is he actually going to do about it? Well, Mandelson will this week meet some of the UK's largest institutional investors to discuss how to protect British companies from unwanted takeover bids. The meeting will use Kraft's hostile takeover bid for Cadbury as a "case study" for the discussions, it has been reported.

Mandelson is apparently going to ask leading investors to show "stewardship" by taking a stronger line against takeovers from "opportunistic" bidders who might be attempting to purchase quality assets on the cheap, and to not sell out for short-term gain.

And in an article on the FT.com website, Mandelson went on: "directors should expect to run the gauntlet of public and shareholder criticism if they have done their homework poorly, plan to load companies with heavy debt, are motivated chiefly by the desire to strip assets or simply want to make a quick profit off the share price with little respect for the workforce or local interests... The challenge is to find the right balance between the benefits of trading and the benefits of long-term ownership. Long-termism cannot mean complacency."

He continued: "If we are serious about a strong record of company creation and sustainable company growth in Britain, especially in advanced manufacturing and other industries, we need investors willing to take the long view even while they hold management to account."

He stated that it had been "an open secret" during the past two decades that through poor valuation or aggressive cost-cutting, too many takeovers failed to create additional long-term value (erm, actually it's no secret at all - there is overwhelming evidence to show that takeovers usually fail).

He finishes in the FT piece by stating that "for this reason, companies making acquisitions should set out an objective analysis of the potential gains and be entirely open about their intentions for the workforce, while shareholders on both sides have to be genuinely critical".

Such a direct intervention by Mandelson is actually very welcome and reflects something of a shift in sentiment in Labour. All good so far. Yet urging a long-term commitment as Mandelson seems to suggest is not enough. Policy should actually facilitate it.

Essentially, hostile takeovers should be made more difficult - there are plenty of ways to do this as we have detailed in blogs here at the Birmingham Post. Shifting the burden of proof onto bidders as Mandelson suggests so that they have to show how they will bring social and public benefit is one way of doing it - but to be effective that would mean banning takeovers unless this can be proved. Somehow I doubt if Mandelson means to do this.

And it's simply not good enough for Mandelson to use fine words but then claim he is powerless to act, as he has done recently. The reason he has so little real power on this issue is because Labour in its wisdom replaced the public interest element of UK takeover law in its 2000 Competition Act with a narrower competition test which has no consideration for jobs, regional impact, technology, exports and so on (all of which features under the old 'public interest' element).

That mistake needs to be reversed so that ministers can reclaim the power to act if it is in the public interest.

Nor is it good enough to try to gain so-called 'assurances' from foreign firms which takeover UK firms. This approach is often used as a political escape valve by governments and the assurances are never monitored or followed up.

Far better would be a change in our institutional system which gave Cadbury and other UK firms stronger protection in the first place from unwanted hostile bids (whether from foreign or UK firms).

Even if it manages to see off the Kraft bid, Cadbury management will have expended huge amounts of time and energy when they could have been getting on with adding value and building what so far has been a remarkably sustainable and successful business.

Post credit crunch we need a different framework in which business can operate. Making hostile takeovers more difficult is one place we can start. Most takeovers fail after all, as Mandelson appears to recognise, and the huge fees stacked up by merchant banks in setting up takeovers represent a 'takover tax' on the rest of the economy. Things need to change.

Choc-Wars Timeline
7 Sep: Kraft tables offer for Cadbury, valuing the company at about £10bn. This is immediately rejected by Cadbury management
9 Nov: Kraft takes its bid hostile, with the board again rejecting the offer
4 Dec: Kraft outlines the offer to Cadbury shareholders, setting a 5th January for the first offer deadline
14 Dec: Cadbury publishes a hard-hitting defence document, urging shareholders to reject the Kraft offer
31 Dec: Deadline for shareholders to accept the Kraft bid is extended to 2 February
5 Jan: Kraft announces a revised offer with the option of higher cash proportion
6 Jan: Kraft's initial offer gains support of just 1.5% of Cadbury shareholders
12 Jan: Cadbury repeats its strong opposition to the Kraft bid
15 Jan: Deadline for Cadbury to issue trading update
19 Jan: Deadline for Kraft to publish details of revised offer
2 Feb: Deadline for Cadbury shareholders to accept Kraft bid

If Kraft's final offer is rejected, it will have to wait another year before it could bid again.

Professor David Bailey works at Coventry University Business School.