- The Washington Times - Tuesday, January 5, 2010

LONDON — The battle for British candy maker Cadbury PLC was thrown further into doubt Tuesday when a major Kraft Foods Inc. shareholder voted not to endorse the Illinois company’s hostile takeover bid, even as Kraft sweetened its offer with more cash.

Billionaire Warren Buffett’s Berkshire Hathaway Inc. said it had voted against Kraft’s proposal to issue 370 million shares to finance its $16.5 billion bid, saying it was worried Kraft would raise the bid even higher.

Northfield, Ill.-based Kraft earlier Tuesday increased the cash part of its offer after agreeing to sell its North American pizza business to Nestle for $3.7 billion. Nestle also said it wouldn’t be making its own offer for Cadbury, as some analysts had speculated.

That leaves Kraft the sole bidder for now, although Cadbury, the maker of Dairy Milk chocolate and Dentyne gum, has said it has received expressions of interest from the Hershey Co. of the United States and Italy’s Ferrero International SA.

Cadbury dismissed Kraft’s plan to use the money raised from selling brands such as Tombstone and Jack’s pizza to increase the proportion of cash in its offer as “tinkering.”

Berkshire Hathaway, which holds 9.4 percent of Kraft’s stock, said that the share issue would give Kraft “a blank check allowing it to change its offer to Cadbury in any way it wishes.”

“And we worry very much that, indeed, there will be an additional change from the revision announced this morning,” it added. “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 could not be reached immediately for comment on Berkshire Hathaway’s move.

Kraft, whose brands include Philadelphia cream cheese and Oreo cookies, earlier said its change to offer reflected calls by some Cadbury shareholders to have more of the offer in cash and “to be more sparing in its use of undervalued Kraft Foods shares as currency for the offer.”

“Kraft Foods continues to believe that its share price is depressed as a consequence of a number of short term factors which it believes will dissipate once the uncertainty surrounding its offer for Cadbury is resolved,” the company said in a statement.

Kraft said Tuesday it will use an amount equivalent to the net proceeds from the pizza sale to fund a partial cash alternative to its offer.

It 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.

It has until Jan. 19 to revise its offer further.

Berkshire said it will vote to issue shares only if it does not think the final offer hurts value for Kraft shareholders.

Cadbury’s share price is still well above the original value of Kraft’s offer, reflecting the odds that changing the cash component is unlikely to be enough to win over shareholders who are seeking a higher overall price.

Cadbury, which recently outlined its credentials as a stand-alone company by raising its long-term performance targets and producing better-than-expected profit margins, said the offer continued to undervalue the British company.

“Kraft has once again missed the point,” it said. “Despite this tinkering, the Kraft offer remains unchanged and derisory with less than half the consideration in cash.”

Cadbury is due to provide a trading update, including the key Christmas season, next week.

Nestle’s earlier decision to rule itself out of the bidding settled rumors that the Swiss maker of Nescafe coffee and KitKat chocolate was gathering a war chest for a rival bid after it agreed to sell off its 52 percent stake in eye-care company Alcon for $28 billion and announced it would spend less cash on share buybacks.

Some analysts still believe that another suitor may emerge.

“We think that Hershey is keen to make a deal with Cadbury,” analysts at Numis stockbrokers wrote in a research note. “In reality Nestle is acting as a fund provider to the Cadbury deal and we would not be surprised to see the Swiss group play that role again by buying assets from Hershey, the Kit Kat brand in the U.S. being an obvious candidate.”

Nestle, meanwhile, is gaining a pizza business that includes the Tombstone and Jack’s brands in the United States, the Delissio brand in Canada and the California Pizza Kitchen trademark license. It also includes two Wisconsin manufacturing facilities in Medford and Little Chute, Wis.

Nestle said the acquisition will add a “new strategic pillar” to its frozen food portfolio in the United States and Canada, making it a significant player in the $37 billion a year pizza market. Nestle is already represented in the United States with brands such as Stouffer’s, Lean Cuisine, Buitoni, Hot Pockets and Lean Pockets.

About 3,400 employees are expected to transfer to Nestle.

Frank Jordans in Geneva contributed to this report.

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