A Consumer Staples ETF to Play the Kraft / Cadbury Deal

by: Don Dion

Kraft Foods’ (KFT) acquisition of Cadbury that was finally pieced together this weekend had been a developing story for some months now and has been of interest to me as I try and gauge how ETFs will be affected. Kraft gains a fair share of allocation in a few different consumer staples ETFs, but I think the best way to gain from the acquisition is with Consumer Staples SPDR (NYSEARCA:XLP).

KFT accounts for 3.8% of the holdings in XLP and although this is not a very large portion, if Kraft fares well in the mid to long-term after the acquisition, it would increase the value of KFT and help the performance of XLP. In comparison to other consumer staples ETFs such as iShares U.S. Dow Jones Consumer Goods Sector (NYSEARCA:IYK) and Vanguard Consumer Staples (NYSEARCA:VDC), XLP has a marginally larger allocation to KFT and is favorable because it has the lowest expense ratio and best liquidity of the group.

Consumer staples is traditionally a safe haven sector, so ETF investors in this fund looking for steady growth should be glad to hear that I don’t think the Cadbury acquisition developments will knock XLP off its track. This is partly because the leadership of Kraft was sternly warned by Warren Buffett, the largest shareholder of the company, about decreasing shareholder value in pursuit of the British confectioner. They seem to have paid attention, and in the final push to acquire the company, Kraft increased its offer of cash and decreased its share offering.

Selling shares was something that, before Buffet’s comments, certainly seemed to be a possibility. KFT showed it was willing to take an aggressive strategy when it sold a growing pizza business to raise cash for the Cadbury acquisition. In response to Buffett’s message of restraint, KFT went up 4.9% on the day of the warning, showing that if Buffett voices approval of the deal in its final form, shares of KFT will rise and nudge XLP upwards as well.

Kraft should benefit from the acquisition of Cadbury on a longer time frame as well since acquiring the British company gives Kraft more exposure to markets in developing countries.

At this point, what is of no risk to XLP right now is Hershey (NYSE:HSY), which Cadbury had hoped would place a rival bid back when the board of the UK company thought Kraft was not offering enough. Hershey’s only has until the end of the day today to make an offer for Cadbury, and it is rumored that HSY was only going to bid $17.9 billion, meaning that KFT’s offer of $19.6 billion will go ahead as planned. A dip in stock performance of HSY, although a short-term rise in share value is more likely, would not put too much of a damper on XLP since it only accounts for 0.7% of the fund.

To sum up, I believe that XLP is currently the best way to play consumer staples and that the conclusion of the Kraft, Cadbury, and Hershey saga will not create negative volatility for investors.

Disclosure: Long IYK