Hedge Fund Watch – Watching the Smart Money – Kraft Acquiring Cadbury

Background Information

Watching the smart money is very important. John Paulson, hedge fund manger specializing in risk arbitrage (betting on mergers) has doubled his stake on Cadbury and betting this deal will close. Eton Park , run by Eric Mindrich, also has a sizable investment of about 2.5%. A recent SEC filing has showed that Paulson owns about 2% by buying 14.8 million shares.

The bet came after Kraft took its $16.7 billion bid for Cadbury directly to shareholders on Monday, after the board of Cadbury, a chocolate company based in Britain, rejected the offer as too low.

Why the deal will go through

The reason this deal will go through is due to the rules of the deal. The differences between British rules and US rules are likely to bring a quicker close to the takeover battle and force Cadbury to fight this hostile offer on issues of price instead of resorting to the takeover defenses commonly employed in the United States.


The main difference between Britain and the United States in rules is that Britain requires that any bidder that have committed financing at the time of the making of its offer. Because of this, Kraft has been forced to drop its financing condition and replace it with a committed debt facility. In addition, because Britain does not allow due diligence conditions, Kraft has now dropped this condition as well (i.e deal goes a lot faster and costs less).


These regulatory differences, seem really weird, but exist for good reasons. For example, they need these rules because the US needs a special mechanism for a board to protect the corporate enterprise by adopting takeover defenses. In Britain there are substitutes for takeover defenses such as different labor laws so they don’t need one. Thus, again faster and cheaper cost of the deals.

By Group 1