Nestle, Hershey, Ferrero, Kraft all in the run for Cadbury

‘Sweet’ news this week; Cadbury, Hershey, Nestle, Kraft and Ferrero all in the headlines is something that a person who loves chocolate, candy, gums, ice-cream would not miss. This news makes me think of my favourites, Nutella and Oreos.

Cadbury, Britain’s chocolate makers, has been in the ‘spotlight’ since August when Kraft made an offer of £9.9bn. However, the offer was refused because as Cadbury Chairman Roger Carr said, “it did not come remotely close to reflecting the true value of the company”. Since then Cadbury share price has increased so much that it reached 819.5 pence on November 23^rd 2009 which is record level for the company. Furthermore, Ferrero, Hershey and Nestle are all ‘thinking’ about putting a bid for Cadbury as well; this has certainly influenced Cadbury’s share price in a positive way as these three are the world’s biggest confectioners. The American confectioner, Hershey, is pushed by the charitable trust which controls it to make a £10.3bn solo bid for Cadbury. Recent improvements in debt markets which lead to an increase in the amount banks are willing to lend enabled Hershey to finance a stand-alone bid. Cadbury and Hershey are already very well connected as Hershey produces and sells Cadbury products in the US. Hershey’s goal is to enhance its position in the European market through Cadbury as it is an established company which has high brand awareness. I do not see this as a good move for Hershey; the company which was considering selling Wrigley is now trying to massively expand its operations. Hershey’s market cap. is just over $8bn and I believe it is very risking for them to go forward with potential $17bn bid for Cadbury. Furthermore, there seems to be a possibility that Ferrero and Hershey create some kind of joint bid, as daily Il Sole 24 Ore, reported on 21^st November. Family controlling Ferrero is mainly interested in candy and chewing gum business and values Cadbury’s assets that it wants at $11.9bn. They are currently talking to Intesa Sanpaolo SpA and UniCredit SpA about financing the offer. Cadbury seems to be on standby waiting for the highest bid to emerge, and they are now in the position to choose the deal they see fits them the best. Cadbury share price started shooting through the roof when Nestle announce that they are reviewing a possible offer for Cadbury on Monday morning (23^rd November).

The Cadbury story is interesting as it involves big names such as Kraft, Nestle, Ferrero and therefore media has been covering the story from day one and updating it hourly as new information comes out and as more companies join Cadbury bid list.

I have read several articles from Telegraph, Bloomberg, Sky News, Reuters UK, Wall Street Journal and Times Online in order to get a clear picture of what is the latest news on Cadbury and its potential buyers. Each article had a different approach, but information they enclosed in the story was more less the same.

After reading Telegraph story “Hershey lines up $17bn solo bid for Cadbury” I asked myself where did all this info came from since the articles concludes with “Spokesmen for Hershey and the Hershey Trust Company did not return calls. Cadbury declined to comment.” Throughout the article there has not been a single quote or something that would indicate where did information come from, or who was interviewed etc. Because of that I would say that the articles is to some extend bias, otherwise in gives a good understanding to the reader of the latest news and happenings in the case of Cadbury. The article concentrates more on Hershey bid and does not comment much on other companies which are possible Cadbury buyers. Language is clear and it seems that there is no spin on the story; one thing lacking is the source of information because the reader does not know where does all that info come from and how reliable it is. However, saying in the end that spokesman for Hershey did not return calls and that Cadbury refused to comment gives the reader heads up that it might be good idea to look for secondary source of information. Overall the article gives a positive message about the possible bid.

The article by Bloomberg concentrates as well on Hershey and Cadbury. However, surprisingly Bloomberg based their article on Wall Street Journal which I find odd and unusual. There is a small paragraph on the possible joint-bid by Ferrero and Hershey which is based on Il Sole 24 Ore, Italian newspaper. I would imagine that Bloomberg would do lot more research on the story rather than base it on what other newspapers have written about it. Overall there is no “new” news since the story seems to be more of a ‘summary’ what Il Sole 24 Ore and Wall Street Journal wrote. The article gives a good overview of all possible Cadbury buyers and how would each of them benefit from the purchase.

The article from Sky News seems to be very up to date with share price movements and it concentrates more on Nestle becoming “the latest name to joint the list of rivals circling the British chocolate maker”. Unlike other articles I read, Sky News actually uses quotes from industry analysts and Cadbury chairman Roger Carr which gives certain weight to the story and makes it more real, more reliable. However, the story delivers more of a negative message since it criticises the Kraft “derisory” bid of £9.8bn. It seems that the article is more in favour of Swiss giant, Nestle, but the good question is why?

Times Online chose to concentrate on share prices of major UK companies and therefore Cadbury found its way into this article as well. It gives very brief overview on what is going on with Cadbury and share prices.

Overall the story is ‘sexy’ because it involves very well known companies and more importantly companies that have been extremely successful in what they do. Nestle and Cadbury have both been in news years before for scandals about their products which has not been mentioned in news these days. Media sometimes tends to ‘dig out all dirt’ they can find, but surprisingly this time they kept quite. I believe that the story is written primarily for the investors, but also general public. This is a perfect example of that media can do to boots or destroy share prices of any given company. My personal opinion in that Cadbury should not go just for the company that gives the highest bid, but also look at strategic possibilities that those companies offer. It is good to remember that sometimes it is not about quantity, it is about quality. My favourites are Nestle and Ferrero because I believe Cadbury needs to expand its operation to the markets where Nestle and Ferrero are very well establish like Italy and Russia for example. And also Nutella and Ferrero Roche just sound right to me. The future will show how Cadbury decides to deal with all the possibilities it has and whether they will chose the right path. The question remains, will Cadbury have a meltdown and will this turn to a price war?

Sources:

Sky News

http://news.sky.com/skynews/Home/Business/Nestle-Joins-Cadbury-Rival-Bid-List-Hershey-And-Ferrero-Already-Considering-Topping-Kraft-Offer/Article/200911415463177?lpos=Business_News_Your_Way_Region_6&lid=NewsYourWay_ARTICLE_15463177_Nestle_Joins_Cadbury_Rival_Bid_List%3A_Hershey_And_Ferrero_Already_Considering_Topping_Kraft_Offer

Telegraph http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/6619071/Hershey-lines-up-17bn-solo-bid-for-Cadbury.html

Telegraph

http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/6634520/Cadbury-shares-jump-to-a-record-high-on-hopes-of-new-bidders.html

Bloomberg

http://www.bloomberg.com/apps/news?pid=20601087&sid=abyLAqm3co_s&pos=4

Reuters UK

http://uk.reuters.com/article/idUKGEE5AM18O20091123

Wall Street Journal

http://online.wsj.com/article/BT-CO-20091123-706887.html

British Airways and Iberia merger

Just a few days ago I finished a group report about British Airway’s competitive strategy and therefore, news about them merging with Spanish flag carrier Iberia caught my attention this week. As BA is British flag carrier and “nation’s pride”, media seems to be very interested in covering every step of the story. BA currently has the biggest market share in UK which is around 42% and is forth largest airliner in Europe. Consequently, BA’s merger with Iberia will have an impact on consumers, employees, UK government, shareholders, competitors etc which is why this is a potentially ‘big news’.

I have read several articles from Financial Times, Daily Mail, The Independent, Business Standard and Guardian.co.uk.

After 16 months of talks and meetings between two companies they finally agreed to merge and sign the deal worth £4bn. Both carriers experienced worst ever financial performance this year due to the current economic environment. Increasing fuel prices, falling consumer income, decreasing load factors and 20-25% fall in sales 1^st class and premium tickets contributed to losses made this year. According to IATA which has 236 airline members reported that it expects losses of airline industry to mount up to $11bn by the end of 2009. Iberia reported net loss of £295m in the first 9 month and BA report £292m half-year loss. Another problem facing BA except the loss is the pension deficit which seems to be currently around £3bn. Newly created holding company will be called ‘TopCo’; I must say I am not very impressed with the originality of the name. However, it is expected that two companies together will generate €15bn, 62m passengers and will have 419 aircrafts serving 205 cities. I believe this merger will improve BA’s position in the Latin American market as Iberia has well established routes to this part of the world. Together BA and Iberia are third largest airline company in Europe, just behind Air France-KLM and Lufthansa. Companies expect to cut cost through redundancies, IT, back office functions, fleet maintenance, catering, engineering and airport business class lounges; £356m is expected to be saved in first 5 years. I believe that both companies have much bigger problems which cannot be solved with £356m and I am still not convinced that this was a good timing to merge. BA has huge problems with pension deficit and union strikes which seems to be threatening the Christmas travel season. Iberia shareholders will certainly not be happy to have BA’s pension deficit on their back. BA unions made it clear that they will not support the merger if they do not get “guarantees from both airlines that they would not impose compulsory redundancies”. I personally think this was not a good time for companies to merge together because of the economic climate and problems both airlines are carrying with them. I agree that the benefits are endless for both, but merging because they are desperate to cut costs does not seem to me as a good idea. Air France-KLM is a successful merger many articles refer to, but they must not forget that Air France was lucky to in a strong economic environment at the time which is not the case for BA and Iberia. I do understand that the industry “over-burdened” with capacity in the recession is pressuring them to do something in order to maintain their competitiveness. With routes opening up with this merger and routes available to BA as a member of OneWorld alliance will increase their competitive advantage in the market.

The news in very interesting and it can be debated whether this was a smart move right now because there are clear advantages, but there are disadvantages as well which can lead to worsening the current situation at both carriers. I do believe they should have waited a bit longer for their performances to start picking up again. On the other hand if everything goes well this might be just what they needed to boost their financial performance and improve their sales, market share, load factors etc. Then again I do not know what was BA waiting for all these years; they could have done this a long time ago when Air France-KLM or Delta-Northwest Airlines or United Airlines and Continental Airlines. This could have been something that would have helped BA survive this recession much better than it did if they merged with someone years ago. On the other hand, it is just my opinion and I could be wrong.

Articles from FT were very clear and straight forward with their message. I could not see any bias; I found them very objective. They focused more on comparing this merger with other mergers in airline industry years ago whereas other articles from Daily Mail or The Independent focused only on BA and Iberia. FT articles did not have any ‘second hidden meaning’ underneath unlike Daily Mail and Independent. Most importantly FT articles were positive but still objective. The Independent and Daily Mail seem to be very negative in delivering this news. Both articles have a negative outlook on the story and the news about companies getting together. Sentences like “... BA’s mushrooming pension deficit could yet scupper the $7bn deal” or “if BA pension people think that they are going to get sugar daddy coming over from Spain, they had better think again” give certain arrogant note to the article. Irony is present in both articles which is not the case with FT and Guardian. However, the story is important and is considered something not to miss out on my writers. I checked BA’s share price earlier and you can just image what happened to it after the news was published; increased of course.

Just from looking at the headline you can see the obvious difference between what each of the articles ‘think’. “British Airways and Iberia merger sees airline heading for combined £1bn loss” or “Iberia losses take the shine off BA merger” do not portray very happy image or positive message. FT as usual had very neutral or positive headlines like “BA and Iberia joining merger party” or “British Airways, Iberia agree to $7bn merger”. Overall, all articles have a good quality of the information which investor, shareholders, employees or general public might find interesting and useful.

The merger is not 100% done; companies are still waiting to receive anti-thrust and other regulatory clearances. BA promised to resolve the problem with pension deficit and Iberia left room for them to get out of the agreement if BA does not resolve the pension deficit as they see fit. Whether this was a good move for both carriers future will determine; lets wait and see.

Sources:

1) FT “BA and Iberia joining merger party”

URL: http://www.ft.com/cms/s/0/360ef422-cff4-11de-a36d-00144feabdc0.html?nclick_check=1

2) FT “BA targets deals with Iberia template”

URL: http://www.ft.com/cms/s/0/bd5d92a6-d0be-11de-af9c-00144feabdc0.html

3) Mail Online “British Airways and Iberia merger sees airlines heading for combined £1bn loss”

URL: http://www.dailymail.co.uk/money/article-1227659/British-Airways-Iberias-merger-sees-airlines-heading-combined-1bn-loss.html

4) The Independent “Iberia losses take the shine off BA merger”

URL: http://www.independent.co.uk/news/business/news/iberia-losses-take-the-shine-off-ba-merger-1820534.html

5) Business Standard “ British Airways, Iberia agree to $7bn merger”

URL: http://www.business-standard.com/india/news/british-airways-iberia-agree-to-7-bn-merger/376433/

John Lewis sales, barometer of the nation's spending

After unexpectedly low GDP figures published couple of day ago Britain should have realized that it is lacking behind some of the Europe’s leading economies. In the past few months media wrote about Britain being out of the recession based on various economic indicators. Having said that I believe that because of all those news people actually started thinking that it might be true; the news might have increased their confidence. After reading some of my previous blogs you can understand that I am not so optimistic about the future outcome of this recession and that we will still find ourselves in economic downturn next year.

This week’s news that caught my attention was again about media speculation on economic recovery based on Halloween. Some might remember this year’s Halloween more, some less, but John Lewis certainly will remember it really well as their sales jumped through the roof.

I have read articles from Reuters, Daily Mail, FT, and Retail Week and most of them wrote that sales at John Lewis are a “barometer of the nation’s spending”. The news is that John Lewis reported massive improvement in sales potentially caused by Halloween and Christmas spirit in consumers. The week of Halloween saw increase in sales by 7.8% whereas John Lewis upmarket Waitrose, supermarket chain, experienced 10.1% increase in weekly sales. The most surprising figure compared to last year is that demand for fireworks went up 8% and the week of 24^th October brought highest ever bedroom items and bed sales. However, the revenue is still lower than in 2007 but £56.4m revenue from department stores sounds good considering current economic health and worse ever performance in 2008. Overall department stores, Debenhams, Marks and Spenser, Next, have been performing better than expected. In the case of John Lewis, only 4 stores contributed to this increase in sale whereas in 2007 most of the stores contributed equally. The interesting fact is that all articles suggested that this increase in consumer spending is sign of economic healing. Are these articles right, do increased sales in major department stores indicated economic recovery or is it just Christmas “fever” starting to kick off? Walking down the Oxford Street is “mission impossible” nowadays because people started to shop around for Christmas presents and Oxford Street is place you do not want to be during the weekend.

The headline of the article from FT stated that “John Lewis’ sales raise hope for recovery”. The media was packed with this type of headlines two weeks ago and when falling GDP figures went public on Friday, media stopped, and couple of days after they started again. I believe that government is well aware of the influence this news has on people. With current financial situation government desperately needs media to encourage spending through ensuring people that we are just about out of the recession. I believe that this unexpectedly large increase in department stores sales is partially due to media influence and partially due to the time of the year; people started doing their Christmas shopping.

Both articles from FT were very short, with brief explanation of the figures showing the improvement in sales, but one thing surprised me. So far I have never seen FT being even a little bit biased. Both articles expressed their opinion about what this increases in sales means for nation’s recovery which is I find unusual for FT to do. However, the language used in both was clear. Interestingly FT articles were the only ones that did not comment on Waitrose increase in revenues. Usually my least favourite source, Reuters, was the most objective from all I have read on John Lewis news together with Daily Mail. The article from daily mail was very easy to read and language used was clear; little remarks such as “Waitrose said shoppers appeared to have a sweeter tooth than last year, with demand for toffee apples boosted by 90%” made this article interesting to read for me. Retain week was the only article that included opinion of someone from John Lewis, operational development director who said that Christmas ranges are “particularly well received”.

One strange thing about these articles was that couple of them have different figures for John Lewis weekly revenues, Waitrose revenues and percentage increases. The difference was not huge but it was still enough for me to notice. It raises the question of accuracy and people could get slightly different view depending on which article they read.

Trying to figure why was this story written and for who, I came to conclusion that story was written for general public with the intension to bring some positive attitude and probably increase confidence about economy. This answers to some extent the question why was the story written. Certainly Gordon Brown’s government needs it since falling GDP was not working in the favour of his party. The news might be interesting in potential investors as well. It is not world braking new and probably would not be read by people outside Britain. After reading carefully all five articles I can say that it is enough to read headline and first two sentences to get general idea because of the nature of the news. I must not forget to mention that John Lewis share price went up after this news was published.

Overall I believe that news like this one serve to increase nation’s confidence and whether it is working we will see in near future. For now it seems to me that it is working, what do you think?

Sources:

Financial Times

URL: http://www.ft.com/cms/s/0/9798508e-cacd-11de-97e0-00144feabdc0.html

Retail Week

URL: http://www.dailymail.co.uk/money/article-1225778/John-Lewis-sales-surge-continues.html

Financial Times

URL: http://www.ft.com/cms/s/0/f4f1d934-cb3c-11de-97e0-00144feabdc0.html

Mail Online

URL: http://www.dailymail.co.uk/money/article-1225778/John-Lewis-sales-surge-continues.html

Reuters

URL: http://www.reuters.com/article/cyclicalConsumerGoodsSector/idUSL666905520091106