Why shareholders should stick with Cadbury
By
Matthew Lynn Dec 11, 2009
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The British have discovered economic patriotism pretty late in the day. Land Rover and Jaguar were sold off to the Indians, Heathrow to the Spanish, and Rowntree to the Swiss. Our power companies are French, our investment banks American.
But Cadbury? The Birmingham-based chocolate manufacturer, under assault from the American food giant Kraft, appears to have stirred a last defiant stand against the foreign takeover of Britain's traditional businesses. The deputy prime minister, Peter Mandelson, has suddenly discovered a passion for British manufacturing, columnists debate the need for an industrial strategy, and the blogosphere and twitterati are in a sweat about the possible disappearance of Dairy Milk.
In truth, Cadbury should remain British, but not for the reasons that people usually argue. Protecting British companies is a daft way to try and re-build the UK economy. It won't mean more factories in this country, nor will it stop jobs being transferred abroad. Shareholders should reject the hostile bid for Cadbury – but for far narrower, more self-interested, reasons.
Cadbury has a heritage to be proud of. It is one of the few giants of Victorian capitalism to survive and prosper into the 21st century. It has brands that are recognised around the world. And, over many years, it has delivered consistently respectable results for its shareholders. In 1989 Cadbury's shares were around 175p. They were above 600p before the Kraft bid was launched. That is a pretty good record for a well-established company in a mature market. Kraft acknowledges all of that, of course. At £11bn, it is putting more than a fair price on the business. The 800p-a-share offer is a hefty premium on the original price. Despite that, opposition is stirring.
"If you think that you can come here and make a fast buck, you will find huge opposition from the local population and from the British government," said Mandelson last week. Even by his standards of spin, it was a bizarre comment. After all, the last decade of Labour government has been all about encouraging people to make a fast buck in Britain. It has steadfastly refused to protect a single British company from foreign takeover. And as for this opposition from the British government, what exactly does it consist of? Absolutely nothing so far. Yet Mandelson has a feel for the political weather, and was smartly tapping into the unease about selling Cadbury. People sense that the UK needs a new economic path. The idea that we can make a living by hosting half the world's investment banks and hedge funds and encouraging every Russian oligarch and Middle Eastern oil sheik to base themselves in London has, to put it mildly, taken a bit of a knock in the past year.
No one would deny that the UK economy needs to be restructured. It has been too dependent on financial services, government spending, and the reckless accumulation of debt. But that isn't going to be achieved through industrial policy. Nor will it be achieved by protecting national champions. It is far too late for the UK to embark on French-style planning and protectionism. We don't have the kind of political, industrial and financial élite that could make that work, even if we wanted to.
No, the reason shareholders should reject the Kraft bid – and any rival offer that emerges from Nestlé or elsewhere – is that there are precious few other places where you'd feel happy investing your money. Interest rates are so low you don't want to be in cash – and anyway, you can't really trust the bank you've left it in. Government bonds hardly look safe anymore: sovereign debt is already building up as the next leg of the credit crunch. Commodities look over-stretched. Gold has its supporters, but that's already looking like a bubble: it's hard to make money when you buy an asset at the top of the market. Emerging markets will do well. But just because the Chinese economy grows, it doesn't follow that shareholders will make any money – and certainly not foreign ones.
Some of the few assets you can really feel comfortable owning are big, reliable, blue-chip companies with powerful brands and a long-term record of delivering respectable returns to their shareholders. In a world of slow growth and moderate, persistent inflation, these should keep pace with rising prices, and pay regular dividends as well.
So quite what shareholders are going to do with the £11bn they get for Cadbury remains a mystery. They can leave it in Kraft, or they can invest it in another safe, reliable, blue-chip company. But there are a diminishing number of them. And the fewer there are, the more the prices get pushed up.
If Cadbury gets taken over, shareholders will have taken it out of a safe and reliable home, and thrown it into a dangerous, uncertain one. They'd be better off leaving it where it is: Cadbury shares should triple again by 2030, and pay consistent dividends. There aren't too many assets you could confidently forecast that for.
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