WALL STREET JOURNAL: Berkshire Issues Warning to Kraft

By DANA CIMILLUCA And CECILIE ROHWEDDER

Warren Buffett waded into the takeover saga surrounding Cadbury PLC Tuesday with an unusually public move to block Kraft Foods Inc.’s issuance of shares to fund its $16 billion offer for the British confectioner.

Mr. Buffett’s move marked a sharp rebuke from Kraft’s largest shareholder and came on the same day the U.S. food giant sweetened its hostile offer for Cadbury.

The Cadbury saga, which has dragged on for four months, has suddenly become a rollercoaster. In addition to Kraft’s new offer, which raises the cash portion, and Mr. Buffett’s tart reply, potential rival Nestlé SA formally removed itself from any deal on Tuesday. Another possible bidder, Hershey Co., remains mum on its intentions.

Berkshire Hathaway Inc., Mr. Buffett’s sprawling holding company, said Tuesday that it voted “no” on Kraft’s effort to issue as many as 370 million shares to fund the cash-and-stock offer for Cadbury, which is now valued at £10.2 billion ($16.4 billion). The Berkshire statement cited a fear that Kraft will overpay in the acquisition. Berkshire said it controls about 9.4% of Kraft’s shares outstanding, making it the company’s largest shareholder.

The statement appeared to be a response to Kraft’s announcement earlier in the day that the company would amend its offer for Cadbury by increasing the cash component. The overall value of the bid didn’t change.

The sweetened bid accompanied an announcement that Kraft would sell its North American frozen-pizza business to Nestlé for $3.7 billion. Kraft said it would use net proceeds from the Nestlé deal, which it estimates at 60 pence (97 U.S. cents) per Cadbury share, to give Cadbury shareholders a “partial cash alternative” to its existing offer, which had been made up of 60% Kraft stock and 40% cash.

Both Kraft and Cadbury shareholders have a say on whether the deal happens. Kraft shareholders will vote on Feb. 1—a vote that will now take place with Mr. Buffett’s warning ringing in their ears.

“The share-issuance proposal, if enacted, will give Kraft a blank check allowing it to change its offer to Cadbury—in any way it wishes,” Berkshire said.

A number of investors scratched their heads at the statement, given that, according to a timetable set out by U.K. takeover authorities, Kraft has until Jan. 19 to raise its offer—meaning that they will know by then what they are voting on.

Cadbury swiftly rejected the revised bid, a stance it has taken since early September. “Kraft has once again missed the point,” a Cadbury spokesman said. “Despite this tinkering, the Kraft offer remains unchanged and derisory with less than half the consideration in cash.”

In a statement, Kraft said it takes Mr. Buffett’s opinion seriously. “We agree that Kraft Foods shares are deeply undervalued and we would certainly not do anything that hurts shareholder value,” said a spokeswoman. “We intend to remain disciplined in this process.”

John Haynes, head of U.K. equity research at Rensburg Sheppards Investment Management Ltd. in London, said he would recommend his firm’s clients reject Kraft’s new offer. “It’s not really improved. It was 740 before, it is 740 today, which is massively too low as a starting point,” he said. “There is a tiny bit more cash and you give up some shares, but most of our shareholders don’t want Kraft shares anyway.”

Rensburg Sheppards manages individual, segregated trading accounts for private clients, many of which contain Cadbury shares. As of November, the firm accounted for 4.7 million Cadbury shares, according to LionShares.

Tuesday’s moves put the Cadbury sweepstakes in better focus. Kraft remains the only declared suitor, but one under pressure to improve its offer. Nestlé, meanwhile, formally removed itself from the running for Cadbury for the first time. Still weighing its options is Hershey, the U.S. chocolatier that has been considering a bid. Italy’s Ferrero SpA has said it is considering its options with regard to Cadbury but the odds that it will launch a full-blown bid of its own are low.

Kraft’s offer was 745 pence per share when the Northfield, Ill., company made it official in early November. That included 300 pence in cash. Cadbury’s share price fell on the news that Nestlé, which had been considered the potential suitor with the greatest ability to trump Kraft, won’t be making a bid for the company, and as a result of the pressure on Kraft from Mr. Buffett not to overpay.

Cadbury shares fell 3.6% to 776 pence in Tuesday afternoon trading in London. That is still above the Kraft offer price, indicating investors will follow Cadbury management’s cue and reject the offer unless Kraft raises it. That could now be more difficult given Mr. Buffett’s latest missive.

Berkshire, which holds about 138.3 million Kraft shares, said “we worry very much that, indeed, there will be an additional change from the revision announced this morning. What we know with certainty, however, is that Kraft stock, at its current price of $27, is a very expensive ‘currency’ to be used in an acquisition.” It added: “In 2007, in fact, Kraft spent $3.6 billion to repurchase shares at about $33 per share, presumably because the directors and management thought the shares to be worth more.”

Berkshire did note that Kraft has two weeks to announce a final offer for Cadbury. “If we conclude at that point that the offer does not destroy value for Kraft shareholders, we will change our vote to ‘yes’” on the share-issuance plan.

Cadbury plans to report its latest results on Jan. 15, when it will once again explain its reasons for rejecting the offer. Kraft is expected to wait until it sees those results before putting in any new offer.

By selling the pizza business, Kraft is giving up one of its top growing units. Among its brands are Tombstone, California Pizza Kitchen and DiGiorno. In announcing the deal with Nestlé Tuesday, Kraft said it would use proceeds for “deleveraging to maintain its investment grade credit rating.”

Nestlé on Monday had bolstered its own coffers by selling its stake in eye-care company Alcon Inc. to Swiss drug maker Novartis AG for $28.1 billion in cash. As part of Tuesday’s announcement, Nestlé said “it does not intend to make, or participate in, a formal offer for Cadbury,” officially taking itself out of the running for Cadbury for the first time.

That leaves Hershey as the most likely counter bidder. People familiar with the matter have said that Hershey is considering such a move, though it wasn’t expected to make a decision before Kraft puts its final offer on the table as part of the 60-day timetable.

Still, Hershey’s ability to make an offer is constrained. The Pennsylvania company is smaller than Cadbury and making an offer would jeopardize its credit rating and risk massive dilution for its shareholders.

Kraft, by Wednesday morning, is expected to detail for the first time the level of acceptances it has received so far from Cadbury shareholders. Cadbury shareholders have until Feb. 2 to tender their shares —unless another suitor emerges, which could extend the timeframe.

—Tess Stynes contributed to this article.

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