Kraft Foods: Questions Cadbury Defense

Northfield / IL. (kf) Kraft Foods Inc. has considered Cadbury´s formal response to its offer to acquire all of the issued and to be issued share capital of Cadbury PLC. Cadbury Shareholders are being asked to choose between having the value certainty and upside potential of the Offer versus taking the risk of continuing to own Cadbury Shares in the absence of any offer.

Certainty and upside potential of the Offer

As outlined in Kraft Foods´ offer documentation:

• the Offer represents a substantial premium to the unaffected share price of Cadbury;
• Kraft Foods believes that Cadbury and Kraft Foods represent a uniquely complementary fit;
• Kraft Foods believes that a combination with Cadbury will provide the potential for meaningful revenue synergies and significant cost savings, delivering substantially more value than Cadbury could achieve on its own;
• Kraft Foods believes that its current trading and prospects are strong; however, since the announcement of its possible offer for Cadbury on 07 September 2009, Kraft Foods believes its share price performance has been adversely affected by a number of deal-related factors of a short-term nature, which are expected to dissipate once there is clarity over the outcome of Kraft Foods´ Offer.

Risks of continuing to own Cadbury Shares

In contrast with the value certainty and upside potential provided by the Offer, Cadbury is asking its shareholders to put their faith in possible future value creation based on a set of long-term targets, never before achieved by Cadbury and subject to significant risk and uncertainty. Furthermore, Kraft Foods notes that Cadbury has chosen to concentrate on long term targets, with very little information on its prospects for 2010.

In this context, Cadbury Shareholders might wish to ask Cadbury the following questions, which are not addressed in Cadbury´s defence document:

1. How will Cadbury deliver its new revenue growth targets?

What are the specific volume and price / mix assumptions underlying Cadbury´s growth targets? Specifically, in a relatively low inflation environment, what are Cadbury´s assumptions regarding price increases, given that Cadbury´s revenue growth in the first three quarters of 2009 was price / mix driven? In addition, to the extent that revenue growth in developed markets requires underlying volume growth, how does Cadbury reconcile this requirement with its lack of volume growth to date in 2009? And what is Cadbury´s expectation for volume growth in developed markets in 2010?

2. How will Cadbury deliver its margin targets
without further spending on restructuring?

Cadbury has spent in excess of one billion GBP in «one off» costs during nearly seven years of its Fuel for Growth and Vision into Action restructuring programmes. And, it plans to keep spending until 2011. Cadbury has previously exceeded its restructuring cost targets. Kraft Foods notes that, by Cadbury´s own admission, Cadbury has yet to deliver 55 percent of its expected annual savings from the Vision into Action programme even though it has incurred 80 percent of its targeted costs. How can Cadbury deliver its revised margin targets with only a 25 to 50 basis point increase in business improvement costs?

3. Are Cadbury´s margin goals achievable?

Key input costs, such as cocoa, are expected to remain high. Why hasn´t Cadbury provided guidance for expected input costs into 2010? Also, given its stated confidence in its long term margin targets, why has Cadbury not forecast its much more relevant and nearer term 2010 earnings?

4. What is Cadbury´s underlying cash flow?

After excluding cash flow from discontinued operations and disposal proceeds, Cadbury has generated limited free cash flow since 2006. How much free cash flow (excluding discontinued operations and disposal proceeds) will Cadbury generate in 2009? How much free cash flow does Cadbury expect in 2010?

Commenting on Cadbury´s Defence Document, the Chairman and CEO of Kraft Foods, Irene B. Rosenfeld, said: «We have heard nothing from Cadbury that surprises us. Cadbury´s Defence Document only reinforces our belief that there is a compelling strategic and financial rationale to combining these two companies and that doing so would be in the best interest of both companies´ shareholders. Having said that, Kraft Foods will continue to maintain a disciplined approach with respect to the acquisition of Cadbury in line with the criteria outlined in our offer documentation».

US Competition Clearance

Kraft Foods is pleased to announce that the applicable waiting period under the United States Hart-Scott-Rodino Antitrust Improvements Act of 1976 (as amended) has now expired. Accordingly, the US competition condition to the Offer is now satisfied.

Info: Kraft Foods Inc. Statement Regarding Cadbury PLC and U.S. Competition Clearance (complete news release).