Why Cadbury Should Stay British.

In Money Week this week, I've been discussing why Cadbury should remain British. Here's a taster.

The British have discovered economic patriotism pretty late in the day. Land Rover and Jaguar were sold off to the Indians. Heathrow to the Spanish, and Rowntree to the Swiss. Our power companies are French, and the investment banks American.
But Cadbury? The Birmingham-based chocolate manufacturer, under assault from the American food giant Kraft, appears to have stirred a final, last defiant stand against the foreign takeover of Britain’s traditional businesses. The Deputy Prime Minister Peter Mandelson has suddenly discovered a passion for British manufacturing, columnists debate the need for an industrial strategy, and the blogosphere and twitterati are in a sweat about the possible disappearance of Diary Milk.
In truth, Cadbury should remain British, but not for the reasons that people usually argue. Protecting British companies is a dumb way to try and re-build the UK economy. It won’t mean more factories in this country, nor will it stop jobs being transferred abroad. There’s no point in trying to emulate French economic jingo-ism: it hasn’t worked that well on their side of the Channel, and it will work even less well here.
But shareholders should reject the hostile bid for Cadbury for far narrower, more self-interested reasons. There are too few decent, long-term places to put your money left in the world for to justify sacrificing one more of them. Indeed, the Cadbury’s bid will be a key test of whether fund managers and shareholders have woken up to how much the capital market have changed in the last eighteen months – and how hard it is going to be to make money going forward. If they are willing to lose Cadbury, they are deluding themselves if they think they can make better use of the money elsewhere.
Cadbury has a heritage to be proud of. It is one of the few giants of Victorian capitalism to survive and prosper into the twenty-first century. It has brands that are recognised around the world. And, over many years, it has delivered consistently respectable results for its shareholders. In 1989 Cadbury’s shares were around 175p. They were above 600p before the Kraft bid was launched. That is a pretty good record for a well-established company in a mature market.
Kraft acknowledges all of that, of course. At £11billion, it is putting more than a fair price on the business. The 800p a share offer is a hefty premium to the price before the bid was launched.
Despite that, opposition is stirring. “If you think that you can come here and make a fast buck, you will find huge opposition from the local population and from the British Government,” said Mandelson last week. Even by his standards of spin, it was a bizarre comment. After all, the last decade of Labour Government has been all about encouraging people to make a fast buck in Britain. It has steadfastly refused to protect a single British company from foreign takeover. And as for this opposition from the British government, what exactly does it consist of? Absolutely nothing so far.
Yet Mandelson has a feel for the political weather, and was smartly tapping into the unease about selling Cadbury. People sense that the UK needs a new economic path. The idea that we can make a living by hosting half the world’s investments bank, and hedge funds, and encouraging every Russian oligarch and Middle Easter oil sheik, to base themselves in London, has, to put it mildly, taken a bit of a knock in the past year.
No one would deny that the UK economy needs to be re-structured. It has been too dependent on financial services, government spending, and the reckless accumulation of debt. But that isn’t going to be achieved through industrial policy. Nor will it be achieved by protecting national champions. It is far too late for the UK to embark on French-style planning and protectionism. We don’t have the kind of political, industrial and financial elite that could make that work even if we wanted to.
The reason shareholders should reject the Kraft bid – and any rival offer that emerges from Nestle or elsewhere – is their own self-interest.
In a post-credit crunch global economy, there are precious few places you’d feel happy investing your money. Interest rates are so low you don’t want to be in cash – and anyway, you can’t really trust the bank you’ve left it in. Government bonds hardly look safe anymore: sovereign debt is already building up as the next leg of the credit crunch. Commodities look over-stretched. Gold has its supporters but that’s already looking like a bubble: it’s hard to make money when you buy an asset at the top of the market. Emerging markets will do well. But just because the Chinese economy grows, it doesn’t follow that shareholders will make any money – and certainly not foreign ones.
In reality, one of the few assets you can really feel comfortable owning are big reliable blue-chip companies, with powerful brands, and a long-term record of delivering respectable returns to their shareholders. In a world of slow growth, and moderate, persistent and rising inflation, they should keep pace with rising prices, and pay regular dividends as well.
So what exactly are shareholders going to do with the £11 billion they get for Cadbury? They will struggle to re-invest the money into some other asset class – for the simple reason that none of them look very appealing. They can leave it in Kraft, or they can invest it in another safe, reliable blue-chip company. But there are a diminishing number of them. And the fewer there are, the more the prices get pushed up.
If Cadbury get taken over, the shareholders will just be wondering what on earth they can do with the money. They will have taken it out of a safe and reliable home, and thrown it into a dangerous, uncertain one. In their own interests, they’d be better off leaving it where it is. Cadbury shares should triple again by 2030, and pay consistent dividends as well. And there aren’t too many assets you could confidently forecast that for.