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

Response from Kraft Foods to follow-up questions from the Business, Innovation and Skills Committee

1.  Cost of bid to Kraft in terms of advisors, research and documentation

  As part of our acquisition of Cadbury, we paid approximately $40 million in transaction related fees in 2009.

  Fees incurred during 2009 are disclosed in Kraft Foods Form 10-K filing to the US Securities and Exchange Commission, 25 February 2010, and are not itemised according to individual elements of the transaction. Further fees will be incurred during 2010 which are not yet available.

2.  Names of advisors on the content and nature of public statements Kraft made before the takeover. What was the nature of their advice and how did it impact on decision to make statement about Somerdale?

  Kraft Foods was advised by Lazard & Co. Limited, Clifford Chance LLP, Deutsche Bank AG, Citibank Global Markets Limited and Brunswick Group LLP on the public announcement it made on 7 September 2009. The statement concerning Somerdale was included in that announcement. (For completeness, Ernst & Young LLP provided the report on cost synergies contained in that announcement.) Kraft Foods was advised that before making a statement of belief in a public announcement in the context of a takeover offer it had to genuinely hold the stated belief and have a reasonable basis for holding the belief.

  Accordingly, Kraft tested the Somerdale statement against these criteria and concluded (for the reasons explained to the Committee by Mr Firestone on 16 March) that it could properly make that statement.

3.   Kraft's commitments to reducing net carbon emissions. Will Kraft retain Cadbury's commitment to an absolute reduction in net carbon emissions of 50% by 2020?

  We confirm Kraft's commitment to aggressively reducing CO2 emissions. We will maintain the same aggressive intention as Cadbury's target of 50% by 2020 (roughly 4-5% per year). Kraft is on track to achieve its prior target to reduce by 25% between 2005 and 2011—a similar annual rate of reduction to the longer-term Cadbury goal. Kraft will adapt the reporting and measurement process to ensure consistency across the combined company in tracking progress. With both companies achieving similar results to date, we are confident and committed to Cadbury's original goal and intent.

4.  Kraft's objectives regarding packaging and waste. Will Kraft comply with Cadbury's objective to make absolute reductions in packaging waste by 2010 and identify ways to tackle food waste?


5.  Content and nature of communication with Unite before takeover was agreed. What did Unite tell you about Somerdale before the takeover was agreed?

  There were several contacts between Unite and Kraft Foods during the deal process before the offer was recommended by the Cadbury Board on 19 January 2010. Unite sought details from Kraft as to its plans for Somerdale, as Ms Formby said in her evidence to the Committee, and said that it would be unfair to raise the hopes of the workforce if no such details could be provided. Unite indicated some scepticism concerning Kraft's ability to keep Somerdale open. However, Unite did not tell Kraft that Kraft would not be able to keep Somerdale open, or give Kraft specific details from which Kraft could have reached that conclusion independently. On the contrary, Unite sought assurances and guarantees concerning Somerdale, privately and publicly, which Kraft was unable to give for the reasons explained to the Committee by Mr Firestone on 16 March.

  Discussions with Unite will be taken forward by Richard Doyle, whose next meeting is due to take place on 25 March.

6.  Can we also have the profile of job losses from Terry's of York after it came under Kraft management in 1993 (see Q 195 of transcript)

  At the time we bought the Terry's business in 1993, around 1,350 people worked at the site. Over time, we implemented several projects to improve cost effectiveness and capacity utilization and we invested significant capital into plant upgrade and new equipment. This investment was considered proportionate to other Kraft Foods chocolate plants in Europe. However, volume declined between 2000 and 2004, driven mainly by reduced export sales of Terry's Chocolate Orange, and this together with the size and configuration of the site, resulted in a cost structure that was unsustainable.

  A decision was taken to propose closure of the site in early 2004 and this was announced on 19 April. The closure plan was confirmed on 22 June 2004, following discussions with unions that concluded there was no feasible alternative proposal to continue making Terry's products in York. Closure was completed in the second half of 2005.

  No production was transferred from York to other sites between 1993 and 2004.

7.  What are Kraft's financial projections for the next five years (eg revenue growth, profitability)? What are the financial projections for the Cadbury part of Kraft's business?

  Cadbury plc's results will be consolidated with those of Kraft Foods from 2 February 2010, onwards.

  The combination of Kraft Foods and Cadbury is expected to provide the potential for meaningful revenue synergies over time from investments in distribution, marketing and product development. As a result, the combined company is targeting long-term organic net revenue growth of 5% or more (prior outlook was 4% or more).

  The combined company is targeting accretion to earnings per share in 2011 of approximately $0.05 on a cash basis, which excludes one-time expenses to achieve cost savings, expenses related to the transaction and the impact of incremental non-cash items such as the amortization of intangibles related to the acquisition. Over the long-term, the combined company is targeting EPS growth of 9 to 11% (prior outlook was 7-9%).

19 March 2010

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