Kraft Foods, in the news today for making its $16 billion bid for Cadbury hostile, is a large Berkshire holding with a position of 158 million shares worth $3.5 billion. With KFT trading near its 52 week low one can speculate that Warren has been adding to his position. However, I believe that Buffett is unhappy with KFT's attempt to take over CBY. He has been quoted as saying KFT's bid for CBY is "fully priced." While CBY's management believes KFT's offer is too low, I would argue that CBY is just another low growth candy business that does not deserve its current valuation of over 26 times Value Line's estimate of 2009 earnings of $1.95 per share. While you must acknowledge CBY's leading brands: Trident, Dentyne, Halls, Sour Patch, Cadbury,etal. the company is at best a slow grower. CBY's earnings have not budged since 2002 and have compounded at an average annual rate of roughly 4.5% since 1984. Its hard to see how a property like this can be worth 26 times earnings.
This bid seems to be a desperation play for KFT which is having growth problems of its own, having seen flat earnings since 2002. I believe KFT's valuation to be very reasonable ie. PE 13, P/CF 10, and dividend yield of 4.3%, which is why Buffett was drawn to the stock in the first place. But if this hostile offer succeeds it will be dilutive to current KFT shareholders as well as aliening CBY's management. I believe if this bid is ultimately sucessful Berkshire will become a seller of KFT stock if they have not been already.
The market seems to agree that this is a lousy merger marking down KFT stock roughly 8% since the original bid was announced in September. Warren Buffett does not believe in over-paying for assets and I believe this merger is the epitome of an over bid.