Cadbury's Sale to Kraft: A National Icon Becomes Just Chocolate

On Monday, the board of Cadbury PLC (CBY) accepted a $19.4 billion buyout offer from American conglomerate Kraft Foods (KFT). As the smoke clears from that momentous decision -- not to mention the months of acrimony leading up to it -- commentators, analysts and chocolate lovers from around the world are arguing over the sale, Kraft's practices, and what Cadbury means to Great Britain.For American consumers, the English fascination with Cadbury may be a little hard to understand. Only a small segment of the extensive Cadbury line is available on this side of the Atlantic: American consumers can't easily get hold of the delicate Cadbury flake chocolate, the complex Fuse, the chewy Curly Wirly, or dozens of other popular, iconic confections. Beyond that, Cadbury-branded chocolate bars in the U.S. seem indistinguishable from Hershey's (HSY) products. There's a reason for this: American Cadbury bars are actually produced by Pennsylvania-based Hershey, just as British versions of Hershey's bars are produced by Cadbury.

Interestingly, many Cadbury aficionados were hoping that Hershey was going to come to its rescue in the Kraft battle. Since late in 2009, Hershey and Italian confectionery company Ferrero have allegedly been mulling a takeover bid, but, in the end, Kraft's offer was too rich for the chocolate makers. In many ways, a Hershey buyout would have been ideal: While fans of the two brands argue over comparative levels of milkfat, wax, and other ingredients, the companies share an appreciation for chocolate that, many fear, Kraft doesn't. Beyond that, Cadbury's global reach would fit nicely into Hershey's strategy for broadening its market: The company currently gets 86% of its revenue from North America, and has sought partnerships and mergers that would bring its products into India and South Korea.

Still, Hershey's market capitalization is less than one fifth that of Kraft, so this particular game of brinksmanship was doomed almost from the start. The final price worked out to $8.19 per Cadbury share and $32.75 for each Cadbury ADS, a price that would have been devastating for Hershey. However, even with the sale accepted by Cadbury's board, the excitement is far from over. To begin with, as The Wall Street Journal recently reported, Cadbury chairman Roger Carr has spent much of the past few months attacking Kraft, calling the company "an unfocused conglomerate" with a management that "under-delivers." Raising the specter of cost cuts and job losses, Cadbury's leaders positioned the sale as a tragedy. On Monday, however, Carr backtracked, stating that he was "pleased" with the merger.

Even beyond the blushing and sputtering that Carr's outspoken statements are bound to cause, there is the public response to the sale. Cadbury has a long and deeply emotional relationship with its consumers: Founded in 1824, the company is one of Britain's signature brands, comparable to Budweiser, Coke, or Hershey in the U.S. But this relationship is a two-way street, and Cadbury's customers have often influenced policy at the company. For example, in 2009, Cadbury briefly experimented with using palm oil as a replacement for cocoa butter in its chocolates. When consumers found out, the public outcry forced the candy company to quickly switch back to cocoa butter. Similarly, Cadbury's 2009 decision to use fair trade ingredients was widely seen as an attempt to improve relations with customers.

Needless to say, Cadbury's loyal fans aren't excited about the buyout. Recognizing that Kraft's purchase is bound to lead to job cuts and lowered standards, many have already begun to protest, loudly criticizing the move and demanding boycotts. Even members of the Cadbury family have weighed in, describing the sale as a "horror story." For Kraft, which undoubtedly factored brand loyalty in as part of the justification for its massive price tag, it looks like this sweet sale may end up sticking in its throat.
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