Kraft Lifts Cadbury Cash as Buffett Says No

To boost its bid for Cadbury, Kraft sold its frozen pizza business to Nestlé for $3.7 billion. But Warren Buffet set the deal back by nixing a proposed stock offering

By Tom Mulier and Andrew Cleary

(Bloomberg) — Kraft Foods Inc. (KFT) raised the cash component of its 10.6 billion-pound ($17 billion) offer for Cadbury Plc (CBY) as investor Warren Buffett objected to a plan to issue millions of Kraft shares to finance the deal.

Kraft said today that it would sell pizza brands including DiGiorno and Tombstone to Nestle SA (NSRGY) and use all the net proceeds from the $3.7 billion deal to add cash to its bid for the Uxbridge, U.K.-based maker of Dairy Milk chocolate, after requests from some shareholders.

Buffett's Berkshire Hathaway Inc., the top stockholder in Kraft, voted against the foodmaker's proposal to issue as many as 370 million shares for the Cadbury purchase. Berkshire said it would endorse a transaction that didn't "destroy value for Kraft shareholders." Kraft takes Buffett's opinion seriously, according to Perry Yeatman, a company spokeswoman.

"The deal looks a bit trickier now," said David Crawford, who runs the 200 million-pound Absolute Return Fund for Octopus Investments Ltd. in London. "It's not ideal for Cadbury shareholders to have Warren Buffett on the other side of the negotiating table."

The sale may hinder the chances of a successful bid by Ferrero SpA and Hershey Co., which analysts had been speculating might team up with Nestle or others to make an offer. Hershey spokesman Kirk Saville declined to comment.

'Purchased Their Silence'

"Nestle held the key to a competitive auction for Cadbury which would've driven the price up," said Martin Deboo, an analyst at Investec in London. "Kraft have purchased their silence and made their own offer marginally more attractive in the process."

Cadbury dropped 27.5 pence, or 3.4 percent, to 777.5 pence at 3:45 p.m. in London after plunging as much as 5.6 percent. Kraft, based in Northfield, Illinois, added 97 cents to $28.40 on the New York Stock Exchange.

The new cash component amounts to about 60 pence per Cadbury share in cash, Kraft said today. The offer valued Cadbury at 742 pence, based on Kraft's closing share price yesterday. The final terms of the offer will be settled by Jan. 19.

"Kraft has once again missed the point," Cadbury spokesman Trevor Datson said by telephone. "Despite this tinkering, the Kraft offer remains unchanged and derisory with less than half the consideration in cash."

Datson declined to comment on Berkshire's statement.

Berkshire said it will wait until Kraft's final offer to decide whether to change its vote to "yes."

'Blank Check'

"The share-issuance proposal, if enacted, will give Kraft a blank check," Omaha, Nebraska-based Berkshire said today in a statement on its Web site. Berkshire holds more than 9 percent of Kraft shares. "To state the matter simply, a shareholder voting 'yes' today is authorizing a huge transaction without knowing its cost or the means of payment."

Kraft's stock "is a very expensive currency" in an acquisition of Cadbury, Berkshire said. It cited Kraft's $3.6 billion buyback in 2007 at $33 a share as evidence that Cadbury shareholders would get a stock potentially worth more.

Buffett, 79, told CNBC in September that Kraft's cash-and- stock offer is a "pretty full" price. Funding a transaction with stock that's worth more money than it's selling for "makes it a tough game," Buffett told the network.

'Remain Disciplined'

"We agree that Kraft Foods shares are deeply undervalued," Yeatman said in an e-mailed statement. "We intend to remain disciplined in this process."

Octopus Investments' Crawford, who bought Cadbury shares after Kraft's first approach, sold about half the stake after Berkshire's announcement. A Cadbury sale remains likely, he said.

"Buffett thinks the timing is poor," said Crawford. "He doesn't want Kraft to do a deal while its shares are undervalued."

Kraft also extended the deadline for shareholders to accept its bid until Feb. 2, the last day in the 60-day timetable set by the U.K. Takeover Panel.

Selling the pizza unit, which was more profitable than the company as a whole, will be "dilutive" to Kraft's earnings and increases the chances that the company will come back with a higher offer on Jan. 19 to secure Cadbury, according to Investec's Deboo.

"It looks like there's money they've kept off the table for now," though Kraft will "struggle" to bid more than 820 pence, Deboo added.

Hershey doesn't have enough cash to fund its own offer for Cadbury, according to Jon Cox, an analyst at Kepler Capital Markets in Zurich. The maker of Twizzlers candy would still find it difficult to bid for the U.K. company even if it joined with Ferrero, the maker of Nutella spreads, he said. A Ferrero spokesman declined to comment today.

'Raises the Bar'

"This raises the bar significantly for Hershey," said Andy Lynch, who manages $1.8 billion in assets at Schroder Investment Management in London. "The great hope Cadbury investors had that Nestle would ride in on a white horse and save them will not materialize."

Vevey, Switzerland-based Nestle said the purchase will make it the world leader in frozen pizza with annual sales of 3 billion francs ($2.9 billion) from that product. The foodmaker estimates the Kraft unit's 2009 earnings before interest, taxes, depreciation and amortization at $279 million, and the purchase will boost its earnings per share in the first year after completion.

To contact the reporters on this story: Tom Mulier in Geneva at tmulier@bloomberg.net. Andrew Cleary in London at acleary7@bloomberg.net.

Business Exchange

Track and share business topics across the Web.