By Jonathan Stempel - Analysis
NEW YORK (Reuters) - Warren Buffett is often a go-to guy when companies want to raise money.
Yet while his Berkshire Hathaway Inc (BRKa.N) (BRKb.N) is Kraft Foods Inc’s KFT.N largest shareholder, he may not be needed as an ace in the hole, as the food company attempts to buy British candy maker Cadbury Plc CBRY.L.
“Buffett could put some Berkshire resources behind a Kraft bid but I find it hard to believe it is necessary,” said Vahan Janjigian, whose book “Even Buffett Isn’t Perfect” was published last year. “Credit markets have thawed enough for Kraft to get financing in traditional ways if it needs it.”
Cadbury, which makes Dairy Milk chocolate, Halls cough drops and Trident gum, on Monday spurned Kraft’s unsolicited $16.7 billion cash-and-stock offer. Kraft products include cheese, Kool-Aid, Oreo cookies and Oscar Mayer meats.
Through his assistant Carrie Kizer, Buffett did not return requests for comment.
Buffett, the world’s second-richest person and probably its most revered investor, is familiar with candy.
Last year, his company funded $6.5 billion toward Mars Inc’s purchase of Wm. Wrigley & Co. It also owns See’s Candies, whose confections Buffett munches at the annual shareholder meetings of Omaha, Nebraska-based Berkshire.
Berkshire owned 138.3 million shares, or 9.4 percent, of Northfield, Illinois-based Kraft as of June 30.
Those shares were worth about $3.6 billion on Thursday. They also throw off $160 million of annual dividends.
“Kraft and Cadbury have what Buffett likes: strong brands that have been around a long time, and which have durable earnings power,” said Justin Fuller, an analyst at Midway Capital Research & Management in Chicago and author of the Buffettologist.com blog.
Yet buying Cadbury may not be cheap. Some analysts believe Hershey Co (HSY.N) could make a long-shot offer, forcing Kraft Chief Executive Irene Rosenfeld to drive up her company’s bid.
“We would not rule out Kraft raising extra cash through a private investor,” analysts at JPMorgan Cazenove Ltd wrote this week, noting Berkshire’s role in the Mars-Wrigley transaction.
Kraft said it would not plan to issue more equity, even if it needed to raise billions of dollars to buy Cadbury.
And asked on Monday if Kraft expects Buffett’s help, Chief Financial Officer Timothy McLevish parried the question, saying: “We have strong banking relationships and good access to debt capital markets and feel quite confident that we will not have difficulty with financing.”
THE “BUFFETT BLESSING”
Berkshire has in recent months sold more stock than it bought, and focused more on high-yielding investments.
In the last year, it has bought a variety of securities issued by General Electric Co (GE.N), Goldman Sachs Group Inc (GS.N), reinsurer Swiss Re RUKN.VX, jewelry maker Tiffany & Co (TIF.N) and motorcycle maker Harley-Davidson Inc (HOG.N).
The Wrigley stake included $4.4 billion of notes and $2.1 billion of preferred stock. Berkshire put up $3 billion toward Dow Chemical Co’s DOW.N purchase of rival Rohm & Haas Co.
And the $8 billion it invested in Goldman and GE comprised preferred shares yielding 10 percent and common stock warrants. The Goldman warrants are worth well over $2 billion now.
Janjigian said Berkshire could easily make such investments at that time, when credit markets were dysfunctional and Buffett was seen by many as a white knight of financing.
Yet he also noted that Berkshire then owned less than $200 million of GE stock and had no reported stake in Goldman.
“He would be in an odd position trying to structure a deal with Kraft that would be favorable to Berkshire, and not also unfavorable to shareholders,” he said.
Berkshire ended June with $24.5 billion of cash.
For its part, Kraft must be careful not to overreach,
While its long-term debt yields only about 2 percentage points more than U.S. Treasuries, according to the bond pricing service Trace, Kraft might have to pay a premium to add debt.
Major U.S. credit agencies said they might downgrade Kraft in light of the Cadbury bid. Rosenfeld said the company will not jeopardize its investment-grade ratings.
Still, if Kraft overextends itself, Buffett would notice.
Buffett “is very cognizant of the price being paid,” Fuller said. “If he starts selling his stock, for example, it would take the Buffett blessing away, and it might be hard for them to gain financing elsewhere.”
Reporting by Jonathan Stempel, editing by Dave Zimmerman; Additional reporting by Lilla Zuill in New York and Jennifer Robin Raj in Bangalore