This being the IPE Zone, you should by now expect a higher standard of prose than average blog fare. After all, I claim to affect attitudes of elegant despair on subprime globalization. Now, one of my favourite subjects has been protectionism the world over. Unsurprisingly, I once vouched that "I am a true aficionado of all sorts of protectionism, appreciating the full range and infinite verisimilitude of human folly." Well, at the end of this post, I may be accused by some of reneging on my general amusement at protectionism by, well, actually indulging in it. But before you get me wrong, read on.
I trust that all of you are familiar with the plight of famous British brands like Jaguar, Land Rover, and Tetley's Tea. Like many others, these marquee names have all been purchased by Indian firms in an act of "reverse colonization." In this case, the Tata Group owns all three. What's notable is that there wasn't much of a fuss with foreigners buying up these archetypally British brands.
However, a far larger issue has been made of American firms trying to buy the great British chocolatier Cadbury plc. Over these past few weeks, Kraft has been trying to take over this greatest symbol of British food industries. If you're not up to speed with this attempted Yank purchase of Cadbury, hie thee to the Financial Times where they have an entire section dedicated to it. To summarize, there are two main arguments against an American buyout of Cadbury, nationalist sentiment aside. First, American chocolate is crap, and having the great Cadbury run by Yanks will also make Cadbury taste like crap. To be honest, I am totally in agreement about the demerits of American chocolate, particularly milk chocolate. While some of the chocolate bars are interesting, US milk chocolate tends to be chalky in texture--heck, even Cadbury made in America tastes that way. It's nothing the Cadbury gorilla can groove to. As an erstwhile Brummie (someone from Birmingham, the birthplace of Cadbury), I've always supported the local product as opposed to arguably superior if more expensive continental European fare. Theirs is mostly dark chocolate, of course.
Second, and this is the more important and less "subjective" point, the finances of Kraft are pretty vile. In comparison, Cadbury has been a steadily profitable business unlike certain casino capitalist financial concerns you find all over the place here in London. Cadbury has a bevy of recognizable and well-loved brands, a wide range of chocolate products, and catchy advertising as you can gather from the clip above (so sue me if it's more 80s music; dig the parody too).
In contrast, the Yankee Kraft concern trying to take over Cadbury has few of those things going for it. Lord Mandelson, the man who now effectively runs Britain, does not seem to be very well-disposed towards this takeover attempt. Major Kraft shareholder Warren Buffett is up in arms over this acquisition attempt as well because of the strains it would put on already-shaky Kraft finances. I was thus amused to find an article in the London Times arguing (get this) Hands off the Crunchie, Lord Mandelson [!] Obligatory rips at uncouth Americans aside, it's chock-full of interesting and entertaining points:
Any Brit who has ventured Stateside can testify to how utterly revolting American chocolate is. Ours is lovely, I can confidently report, having just confirmed with a munch on a Green & Black’s caramel. Charles Dickens almost certainly noted the disparity in quality on his US tours, in papers alas lost to posterity. We may have ceded our position as top dog to the United States, we may resemble a desperate-to-please puppy, yapping up at our former colony demanding attention, but at least we can make a chocolate bar.I demur, of course. The whole point of taking another company over is lost if the combined result is less than the sum of the parts, especially by being "more" in the way of debt. For once, I am in total agreement with a union: Unite is entirely correct in believing that the tsunami of debt hitting the combined concern would hamper its prospects as compared to the relatively healthy state of today's Cadbury. You can do some Yankee-bashing by signing UNITE's petition to keep Cadbury independent, but a more worthwhile trip over to the latter's website should have you having a gander at the massive support site and the aforementioned "shareholder briefing" on the demerits of a takeover. A union site briefing investors, fancy that.
Kraft’s hostile £10.6 billion bid for Cadbury is, as takeovers go, a passion-rouser. The immediate impulse of those of us raised on Cadbury’s chocolate is to throw a protective arm around our Fruit & Nuts. Hershey, whose very name prompts the gagging reflex in anyone who has tasted their revolting kisses, might be mulling a bid. Not one, but two evil, giants circling our plucky chocolatier.
But wait! Is that Lord Mandelson riding to the rescue, brandishing a golden ticket and scattering the yankee upstarts like rebel Oompa-Loompas? Lord Mandelson has not been a quiet observer of the Kraft-Cadbury tussle. He has made his preferences clear. Like the rest of us, Mandy prefers his chocolate British. He prefers jobs to be British, rather than not. Unite, the union, believes that at least 7,000 British jobs would transfer to the US in the event of a successful takeover.
He has postured and pontificated, but as he has no power over the bid he has been largely ignored. The Government can only intervene if foreigners attempt to take over key strategic industries — such as defence companies. Lord Mandelson’s attempts to influence the outcome have, hitherto, fallen firmly in the chocolate teapot category...
In terms of industrial policy, the price of protectionism is interference, high taxes, regulation. A more open system demands light-touch tax and regulation. We could end up with the worst of all worlds: a theoretical model based on free trade, presided over in practice by a man who threatens intervention without telling anyone the new rules, all in a business climate that is a burdensome, bureaucratic fog.
The problem with the Kraft takeover, from a financial rather than epicurean perspective, is the indebtedness, not the nationality, of the predator. Unite, the union, estimates that the takeover would leave a £22 billion debt mountain to be serviced, which means job losses and short cuts on quality control. If Lord Mandelson wants to be really useful, he could look at restrictions on takeovers based on excessive leveraging, not nationality. But “less debt in the mergers and acquisitions market” is not as catchy a pre-election rallying call as: “Back away from my Crunchie, Yankee!”...
We would all like Cadbury to survive Kraft’s bid — this much is obvious as I pick the last crumbs of Crunchie from the awkward fold in the bottom of the wrapping. But saving this one company from a foreign predator is not worth setting a precedent: one that allows a business secretary to interfere in the business of takeovers, based on a whim; one that overturns all notions of free trade; one that could damage our international reputation as a place that values fair business practices and minimum state intervention. These are more important British principles, alas, than a decent bar of chocolate.
From the WSJ we also get word that the equally yucky yet storied Hershey is mulling its own bid to counter Kraft's offer. But, while it may up the ante, the main takeaway is that the health of Hershey's balance sheet is not good, either:
Hershey likely can't go as high as 850 pence, due to concerns about maintaining an investment-grade credit rating.My opinion is clear, then, on degustatory and financial grounds: This great British brand has nothing to gain from a Yankee takeover. As the chorus of populists the world over goes, "Yankee, go home!" This Curly Wurly ain't for you--it's in the air tonight.
Samuel Weaver, a finance professor at Lehigh University who was in charge of valuing acquisitions at Hershey for 15 years until the late 1990s, said that Hershey should tread carefully in an acquisition of Cadbury. He said he worries that new debt would cripple a combined Hershey-Cadbury. He added that the combined company would have to allocate most of its cash flow to paying down debt, instead of funding a dividend payout and reinvesting in the company.
"It really gets ugly with the debt service going forward," Mr. Weaver said. He said he would counsel Hershey executives to allow the company's investment-grade rating to drop to one notch above speculative grade only if they had a three-year-plan to raise the combined company's credit rating.
19/1 UPDATE: Disgusting news--Cadbury accepts a revised Kraft offer at 840p. How my stomach churns! Ah well, there's always...Lindt.
20/1 UPDATE: The Guardian has a helpful graphic describing the revamped competitive landscape among the world's top four confectioners.
12/3 UPDATE: Now I remember--the reason why Cadbury sold in America tastes inferior to the British product is it's made by Hershey. With the Yanks now at the controls, I fear that poor taste may cross the Atlantic.