In an unprecendented move, Berkshire Hathaway is publicly, and strongly, criticizing Kraft Foods for its continuing efforts to acquire Cadbury .
Berkshire says in a news release this morning that it has voted against Kraft's proposal to authorize the issuance of up to 370 million shares to facilitate a deal, and urges other shareholders to follow its lead.
As the release pointedly notes in its first paragraph, Berkshire and its pension funds control a stake of over 9.4 percent in Kraft. Berkshire is Kraft's biggest shareholder, with over 138 million shares.
Kraft shares are rallying over 3 percent this morning to $28.44, apparently on the belief that Buffett's opposition will keep Kraft from raising its bid yet again.
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While Buffett's name is never mentioned in the news release, it clearly reflects his views, and he's not happy.
It is extremely unusual for Buffett to be so publicly critical of a company in which Berkshire has a stake. One long-time investor tells us that "NEVER in my recollection has Berkshire ever voted against management .. This is very significant."
Buffett did signal back in Septemberthat he opposed an increase in Kraft's bid at the time, calling the offer "pretty full." At that time, however, he told us he wasn't opposed to the existing bid and had confidence in Kraft's management.
Things have apparently changed.
Today's release says Kraft's share-issuance proposal would "give Kraft a blank check" to change its offer for Cadbury "in any way it wishes" .. and "we worry very much that, indeed, there will be an additional change" from the sweetened bid (more cash, less stock) announced by Kraft today.
"To state the matter simply, a shareholder voting 'yes' today is authorizing a huge transaction without knowing its cost or the means of payment.
What we know with certainty, however, is that Kraft stock, at its current price of $27, is a very expensive 'currency' to be used in an acquisition."
Berkshire recalls that in 2007 Kraft spent $3.6 billion for a stock buyback at about $33 per share. "Does the board now believe those purchases were a mistake and that Kraft's true value is onlt the current price of $27 per share -- and that it is therefore fine to structure a major acquisition based upon that price?"
The release leaves open the possibility that it could change its vote to "yes" if Kraft's final offer, to be announced by January 19, "does not destroy value for Kraft shareholders."
But for now, Berkshire concludes, "We believe no shareholder should vote 'yes' when he can't possibly know what he is voting for."
Kraft responds that it takes Buffett's opinion seriously, agrees that its shares are deeply undervalued. But, it promises to remain disciplined and "would certainly not do anything that hurts shareholder value."
The company says holders will be able to make a fully informed decision by January 19, well ahead of a February 1 shareholders meeting. It's confident shareholders will authorize the issuance of shares.
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