Mergers, acquisitions and takeovers: the takeover of Cadbury by Kraft - Business, Innovation and Skills Committee Contents

2  The closure of Cadbury's Somerdale factory


7. The Somerdale Factory is seventy-five years old and began production when JS Fry & Sons merged with Cadbury and subsequently moved its business from Bristol to the Somerdale factory in Keynsham, near Bristol.[5] On 3 October 2007, Cadbury announced its plans to close the factory with the loss of 500 jobs.[6] Production at the factory would be transferred both to the company's Bournville plant in Birmingham and, by 2010, to a new plant in Poland. The latter would produce some, if not most of, the brands made at Somerdale including Curly Wurly, Fudge, Turkish Delight, Fry's Chocolate Cream and Cadbury's Mini-Egg.[7]

8. On 7 September 2009, Kraft announced that it believed it could reverse Cadbury's decision to close the factory. Irene Rosenfeld, Chairman and Chief Executive Officer of Kraft, stated that:

    Our current plans contemplate that the UK would be a net beneficiary in terms of jobs. For example, we believe we would be in a position to continue to operate the Somerdale facility, which is currently planned to be closed and to invest in Bournville, thereby preserving UK manufacturing jobs.[8]

9. Even before the takeover, Unite the Union which represents a large proportion of the Cadbury workforce, expressed doubt about the authenticity of this pledge. Jennie Formby, National Officer, Food and Drinks Sector of Unite, explained:

    I have been very disappointed by the fact that Kraft has persisted in repeating what appear to be assurances to the people in Keynsham which, as far as I can see, are very hollow. It has said it wants to keep a manufacturing facility in Keynsham. I have asked what that means […] There is no meat on the bones at all. It has said continually that it does not know enough about it; it does not know how it is configured inside. We have said that surely a company of its experience has an idea of what it looks like inside because there are lots of things in the public domain. The reality is that there is no intention to come and save the jobs.[9]

In January, Professor Bones highlighted the fact that Kraft had reneged on similar promises in the past—most notably a promise to keep open Terry's factory in York when it acquired Terry's in 1993:

    whilst all good intentions are spoken about in the process of an acquisition the track record intriguingly for Kraft was to shut the Terry's of York factory and move production—surprise, surprise—to Poland. Therefore, I do not look at the acquisition commitments perhaps with a great deal of credibility in terms of the comments made for the long term, but I appreciate that this time the circumstances may be different.[10]

10. On 9 February 2010, one week after the takeover was finalised, Kraft announced that it would not be able to keep open the Somerdale factory. Irene Rosenfeld declared that:

    In our recent talks with Cadbury senior management, it became clear that it is unrealistic to reverse the closure programme, despite our original intent to do so. While this is a difficult decision, we have moved quickly to end any further uncertainty.[11]

11. Following the announcement, Kraft faced a barrage of criticism. Unite accused Kraft of "a cruel manipulation", describing the earlier commitment as a "cynical ploy" to gain favour for the bid.[12] Lord Mandelson, who had met Irene Rosenfeld, was also unimpressed with the way in which the announcement was managed:

    A week ago [Irene Rosenfeld] would have known what announcement would be made, barely six days later. It would have been more honest if it had been more straightforward and straight dealing with the company and the workforce and also with the Government if she had told me what their intentions were.[13]

Kraft's explanation to the Committee

12. We questioned Marc Firestone, Executive Vice President, Kraft Foods Inc., on the rationale and the evidence which underpinned both the initial announcement that Kraft believed it could keep open the Somerdale factory and Kraft's subsequent reversal of that announcement.

13. He explained that in September 2009 Kraft believed that it could keep open both the Somerdale factory and the factory in Poland to service Cadbury's existing production requirements and Kraft's expanding production needs in Europe:

    When we envisioned the combined manufacturing network of Kraft and Cadbury, we believed that we would be in a position to maintain production in Somerdale in the UK while also taking advantage of the new facilities that we did know Cadbury was building in Skarbimierz in Poland […] Our capacity requirements were growing tremendously. [14]

    He argued that:

    the combined manufacturing footprint, the growth expectations that we had independently, the growth expectations that we had for the combined company, would in fact support the two facilities, one operating in the UK to service this market—Somerdale—and one operating in Poland to service Central and Eastern Europe. [15]

14. Marc Firestone asserted that this was a "rational business plan" and that the factors he set out "remain valid today".[16] He went on to explain that Kraft reversed its intention after the takeover had been completed because only then did it learn that Cadbury had transferred specialised machinery to the Polish factory which could only be used for producing certain chocolate products aimed at the UK market:

    What we did not know was while the bid was progressing Cadbury was simultaneously operating Somerdale and installing tens of millions of pounds of equipment in Poland; equipment that is specific to their brands. That is not a customary process. They engaged in a process of what is called "parallel running". While Somerdale was producing products, they were bringing on line in Poland the same products in parallel at tremendous cost. Normally when companies switch over from one factory to another they will build up stock in one and then open the other. During exactly the same time as our bid all of these tens of millions of dollars of new machinery specific to products such as Curly Wurly and others were going into the factories in Poland. No amount of resources would have given us access to a physically secured site that was operating in a confidential manner. Sir, I have seen it myself.[17]

However, he acknowledged that there were a significant number of factors that were unknown to Kraft at the time it made public its intentions:

    What we were not aware of were the plans for the internal structure of the building. We were not aware of the status of the machinery going into that facility. We were not aware of the products that Cadbury was designing to make in that facility.[18]

15. Despite those unknown facts, Marc Firestone believed that Kraft had carried out significant research on the Polish factory:

    Sir, we did Google it. We had satellite images of it and what those could only show was the exterior of the facility, they could not show the enormous investment in bespoke equipment that Cadbury was putting into that plant. It was confidential, and I believe Richard [Doyle] and Trevor [Bond] will back me up that that was not known to us or knowable to us publicly.[19]

16. When asked why Kraft chose to make its statement about Somerfield without first gathering firm evidence to prove the feasibility of the proposal, Marc Firestone asserted that Kraft had a "sound basis for believing we would be in a position to operate Somerdale and we made that statement in that way.[20] He continued to assert that Kraft had acted responsibly:

    We made the statement based on sound commercial logic and are terribly disappointed that we are not able to carry on, first, as I said earlier, because the workers were disappointed but, second, it was not what we had hoped commercially. Purely from a commercial perspective we indeed wanted to be able to use the greenfield facility in Poland for our existing requirements for Kraft's large chocolate business in Central and Eastern Europe. We had a sound commercial reason for that, but that is not possible because unbeknownst to us while the bid was progressing equipment was going into the Polish factory.[21]

17. Marc Firestone did, however, acknowledge the damage that this had done, both to Kraft's reputation in the United Kingdom and to its relationship with the Cadbury workforce. He expressed regret over how the situation had been handled:

    I would like to take this opportunity before this Committee, to Parliament, Unite and my colleagues to say we fully understand that for over two years employees and colleagues at Somerdale had been through a closure process and that our statement of 7 September that […] created uncertainty about the plans and on 9 February, when we announced that we would be unable to carry forward, hopes and expectations were dashed, as I said earlier, and we are terribly sorry about that. I personally am terribly sorry about that. I was asked earlier what role I had. I was there in the room when that statement was drafted and I do sincerely, personally, express my apology that we have created that uncertainty and we are not able to carry forward with that.[22]

18. We are unimpressed with Marc Firestone's explanation of the events surrounding the closure of the Somerdale factory. Kraft's lack of knowledge about the advanced state of the Polish factory should have inspired caution, not least because public information readily available to the company had clearly stated that the Polish plant factory would be ready in 2010.[23] Furthermore, we find it curious that Kraft decided to highlight the future of just one of Cadbury's 64 manufacturing sites located across the world.[24]

19. We believe that Kraft acted both irresponsibly and unwisely in making its original statement that it believed that it could keep Somerdale open. A company of Kraft's size and experience ought simply to have acted with better judgement. By making its announcement and the subsequent reversal Kraft has left itself open to the charge that either it was incompetent in its approach to the Somerdale factory or that it used a "cynical ploy" to cast a positive light on Kraft during its takeover of Cadbury. We can neither prove nor discount either conclusion. We are aware of speculation in the press that the Takeover Panel is examining this issue. We would expect this to be the case; such serious questions deserve the detailed scrutiny that only the Panel can give.

20. What is clear is that Kraft's actions in respect of Somerdale has undoubtedly damaged its reputation in the United Kingdom and has soured its relationship with Cadbury employees. It will now have to invest significant time and effort into restoring both.

5   BBC archives, Fry's chocolate factory is not about to be bombed, A letter from 1940 Back

6   Cadbury Press Release, Cadbury Trebor Bassett Proposes Restructuring of UK Chocolate Manufacturing, 3 October 2007 Back

7   The Independent, Strike threat over Cadbury's plans to move to Poland, 13 November 2007 Back

8   Kraft's Takeover Proposal document, 7 September 2009 Back

9   Q 63 Back

10   Q 2 Back

11   The Independent, Kraft to close Cadbury factory near Bristol, 10 February 2010 Back

12   BBC News, Dismay at Cadbury's closure plans, 10 February 2010 Back

13   BBC News, Dismay at Cadbury's closure plans, 10 February 2010 Back

14   Q 232 Back

15   Q 232 Back

16   Q 232 Back

17   Q 238 Back

18   Q 256 Back

19   Q 240 Back

20   Q 238 Back

21   Q 241 Back

22   Q 231 Back

23   October 2007; The Independent, Strike threat over Cadbury's plan to move to Poland, 13 November 2007; FCO article, UK in Poland, Cadbury's chewing gum factory in Skarbimierz, 18 February 2009 Back

24 Back

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