January 18, 2010, 09:05 PM EST
By Zachary R. Mider
Jan. 19 (Bloomberg) — Kraft Foods Inc. is close to an agreement to buy Cadbury Plc after raising its offer 9 percent to about 12 billion pounds ($19.7 billion) to overcome months of resistance by the U.K. chocolate maker, three people with knowledge of the matter said.
Kraft is offering 840 pence a share, including 500 pence of cash and the rest in stock, said the people, who declined to be identified because the talks are private. Cadbury would be allowed to pay its holders an additional 10-pence dividend, the people said. Kraft’s previous bid valued Cadbury at 769 pence a share, below Cadbury’s closing share price of 808 pence yesterday.
Kraft Chief Executive Officer Irene Rosenfeld increased her bid after more than four months of pressure from Cadbury and its investors to boost the original offer, first disclosed in September. A purchase would create a company with about $50 billion in annual sales, adding Cadbury’s Trident gum and Creme Eggs to Kraft’s Oreo cookies, Toblerone chocolate and Tang powdered drinks.
“850 in total, however they do it, would be acceptable to us,” said Jeffrey Scharf, president of Scharf Investments in Santa Cruz, California. His firm holds about 760,000 Cadbury shares. Scharf said he thought enough Cadbury shareholders would be likely to accept a bid at that level for Kraft to succeed.
As recently as Jan. 14, Cadbury called Northfield, Illinois-based Kraft an “unfocused conglomerate” with businesses in “unappealing categories.” Kraft had to raise its bid to at least 850 pence to stand a chance of capturing Cadbury, a survey of nine Cadbury shareholders showed.
Price Discipline
The companies may make a joint announcement on a combination as early as tomorrow, the person said.
Trevor Datson, a spokesman for Uxbridge, England-based Cadbury, and Michael Mitchell, a Kraft spokesman, declined to comment. The BBC reported the talks between the companies yesterday.
Hershey Co., which had been considering a bid for Cadbury, is unlikely to top Kraft’s offer, people familiar with the matter said. Kirk Saville, a spokesman for the Pennsylvania- based candy maker, declined to comment.
Rosenfeld vowed to be disciplined on the price for Cadbury. Billionaire investor William Ackman last week joined Warren Buffett, Kraft’s biggest shareholder, in saying Kraft risks diminishing the merits of a Cadbury takeover by issuing too much stock to pay for it.
Buffett’s Stake
Kraft has informed Buffett of the revised deal with Cadbury, one of the people said. Buffett didn’t immediately return a request for comment sent to his assistant, Debbie Bosanek. Buffett’s Berkshire Hathaway Inc. said in a Jan. 5 statement it may support a Cadbury takeover if it concludes that the final offer “does not destroy value for Kraft shareholders.”
Kraft advanced 46 cents to $29.58 in New York Stock Exchange composite trading on Jan. 15. Based on that price, the original hostile offer of 300 pence in cash and 0.2589 Kraft share is more than 60 percent stock. Cadbury shareholders have the option to substitute as much as 60 pence of shares with cash. Kraft shares didn’t trade yesterday because of a holiday in the U.S.
Earlier this month, Kraft said it would sell pizza brands including DiGiorno and Tombstone to Nestle SA and use proceeds from the $3.7 billion deal to boost the 300 pence cash component of its bid by the optional 60 pence.
Kraft has until today under U.K. law to modify its offer, and until Feb. 2 to gain acceptance from a majority of Cadbury investors.
“Kraft provides some strength in the U.S. that Cadbury doesn’t have, and Cadbury provides some strength internationally that Kraft doesn’t have,” said Don Yacktman, founder of Yacktman Asset Management Co., which holds Kraft shares.
On Nov. 9, Cadbury Chairman Roger Carr said the company’s board “emphatically rejected this derisory offer.” In a Jan. 12 defense document, Cadbury said the Kraft offer was worth 12 times Cadbury’s 2009 earnings before interest, tax, depreciation and amortization, while comparable deals in the industry valued the businesses at 14.3 times to 18.5 times.
–With assistance from Duane Stanford in Atlanta and Andrew Cleary in London. Editors: Jennifer Sondag, Celeste Perri
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