Comments on: Cadbury and Kraft – public policy should focus on debt, not nationality

By: Liz McShane

Liz McShane — Thu, 21 Jan 2010 15:32:21 +0000

Mark – there was guy from HSBC markets on Newsnight the other night saying that he thought all those credit rating agencies – Fitch, S&P, Moody etc were a load of rubbish and that the ratings were meaningless….

By: Web links for 20th January 2010 | ToUChstone blog: A public policy blog from the TUC

Wed, 20 Jan 2010 19:31:38 +0000

[...] Cadbury and Kraft – public policy should focus on debt, not nationality Varun Chandra writes on Left Foot Forward that Kraft's heavily leveraged buyout bodes badly for the Cadbury's business in the UK: "The cost of financing the massive mountain of leverage means that much of the cash generated by the business will be spent not on investment and training, but on interest payments." Related posts (automatically generated):Cadbury deal shows little or nothing has been learnedPre-Budget Report LIVE: Online coverage from noonLet’s talk PBR – live coverage this Wednesday [...]

By: Politics Summary: Wednesday, January 20th | Left Foot Forward

Politics Summary: Wednesday, January 20th | Left Foot Forward — Wed, 20 Jan 2010 09:01:33 +0000

[...] to allow ministers to intervene in high-profile deals where the national interest is at stake. Left Foot Forward said yesterday: “we should stop companies picking up British businesses when there is a risk [...]

By: stevie b

stevie b — Wed, 20 Jan 2010 00:46:27 +0000

Cadbury and Kraft – public policy should focus on debt, not … http://bit.ly/5L0a5r

By: Mark

Mark — Tue, 19 Jan 2010 21:28:26 +0000

Cap leverage and firms would quickly find a way around it, whether just issuing equity, resorting to convertible instruments or other more structured items. You could oblige acquirors to state the number of job losses up front, so staff know what’s happening. But we can only ponder, after all the PM is closely linked to a private equity house so nothing is going to change in the wake of this bid.

By: Varun

Varun — Tue, 19 Jan 2010 20:40:27 +0000

Thanks Mark. A final comment from me: UK corporate pensions in takeover scenarios are perhaps the most secure in the world, with the powers of The Pensions Regulator beefed up considerably in the last few years. It can even act retrospectively to hold a company to account. And I’m not sure how a takeover could show ‘due concern’ regarding jobs in any meaningful fashion without risking court action for discrimination. And these aren’t progressive or innovative policy positions in my view – they are already the status quo.

Of course private equity transactions are highly leveraged – their business is borrow lots, cut costs, use cash to pay down debt then sell quickly to make lots of money. And in the last few months many of these businesses have found themselves struggling to stay above water – precisely due to their debt burdens and the difficulty of refinancing in stressed market conditions (I wouldn’t merely call this ‘credit risk’ – it is a genuine operational consideration). When the negative externalities of failure are as significant as could be with Cadbury, leverage caps (applied on a case by case basis, using deal specific metrics that take into account cash flow variance) could be a valuable, and practical, intervention.

By: Mark

Mark — Tue, 19 Jan 2010 20:15:13 +0000

Varun, some good points. But credit risk isn’t the problem here. Many UK deals from London private equity houses are far more leveraged. But capping is clumsy since the cash flow can vary a lot, as can future performance.

The progressive idea would be to ensure a takeover shows due concern for employment and ensured pensions are protected.

By: Tobin Webb

Tobin Webb — Tue, 19 Jan 2010 20:08:47 +0000

RT @leftfootfwd: Cadbury and Kraft – public policy should focus on debt, not nationality: http://is.gd/6BGwB

By: gsdog7

gsdog7 — Tue, 19 Jan 2010 19:15:01 +0000

RT @leftfootfwd: Cadbury and Kraft – public policy should focus on debt, not nationality: http://is.gd/6BGwB

By: Varun

Varun — Tue, 19 Jan 2010 18:34:38 +0000

Mark – thanks for your comment. A few points of information: Kraft is rated BBB, Baa2 and A- by the three main ratings agencies (Fitch, Moody’s, S&P). This is pre-acquisition – the acquisition debt is likely to increase borrowing by a third, which will significantly impact the group’s rating. The article above links to an interesting FT analysis of Kraft’s debt, if you’d care to have a look. Indeed today’s debt markets are indicating fears of a drop in Kraft’s rating to below investment grade. Also, as I’m sure you appreciate, the quantum of debt is very important regarding financial stability. Kraft has nearly $20bn of debt; Cadbury has less than a tenth of this. Yet it will now likely be owned by a highly geared entity with a significant interest coverage requirement. And crucially, the earning’s requirement placed on both companies post acquisition will be challenging, particularly when compared to the group’s (rising) cost of capital. And the point is that if times get tough, or credit markets freeze (as they have just done) the group could find itself in real bother. So no, I don’t think one would necessarily support the takeover if the financial risks were properly understood.