Jan. 18 (Bloomberg) — Kraft Foods Inc., facing a deadline to make a revised bid for Cadbury Plc tomorrow, would have to use cash, rather than stock, for a higher offer to keep its own shareholders satisfied.<\/p>\n Billionaire investor William Ackman last week joined Warren Buffett, Kraft\u2019s biggest shareholder, in saying Kraft risks diminishing the merits of a Cadbury takeover by issuing too much stock to pay for it. Kraft\u2019s 11 billion-pound ($17.9 billion) cash-and-stock bid values the U.K. chocolate maker at 771 pence a share, below Cadbury\u2019s closing price of 794 pence on Jan. 15.<\/p>\n The deficit has left Kraft Chief Executive Officer Irene Rosenfeld trying to win over Cadbury investors without alienating her own shareholders. 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 another 60 pence.<\/p>\n \u201cAny wiggle room you have has almost got to come from the cash side, not the stock side,\u201d Donald Yacktman, founder of Yacktman Asset Management Co., which holds Kraft shares, said in a telephone interview Jan. 15. \u201cThe issue has always been price. It\u2019s not a matter of them being a terrible fit because I think they do fit.\u201d<\/p>\n A takeover of Uxbridge, England-based Cadbury would give Kraft, the maker of Toblerone chocolate and Tang powdered drinks, a faster-growing business and access to emerging markets, such as India. The combined company would have about $50 billion in annual sales.<\/p>\n \u2018Extremely Undervalued\u2019<\/p>\n Ackman\u2019s Pershing Square Capital Management LP bought at least 32 million shares in Northfield, Illinois-based Kraft, or 2 percent of the company, and plans to purchase more. The stock is \u201cextremely undervalued,\u201d Ackman said in a Jan. 15 interview. Pershing\u2019s stake in Kraft is now the firm\u2019s biggest holding.<\/p>\n \u201cThe more Kraft stock they issue, the less interesting this deal is,\u201d Ackman said. \u201cFortunately, the seller also prefers cash.\u201d The deal makes \u201ctremendous sense,\u201d Ackman added.<\/p>\n Rosenfeld announced the additional cash component on Jan. 5, the same day Buffett\u2019s Berkshire Hathaway Inc. said it voted against a plan to issue millions of shares to finance a Cadbury takeover. The proposal, which shareholders will vote on next month, amounts to a \u201cblank check\u201d to modify the bid, Berkshire said.<\/p>\n Berkshire said it may support a Cadbury takeover if it concludes that the final offer \u201cdoes not destroy value for Kraft shareholders.\u201d<\/p>\n \u2018Compelling\u2019 Offer<\/p>\n Kraft advanced 46 cents to $29.58 in New York Stock Exchange composite trading on Jan. 15. Based on that price, the 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.<\/p>\n Cadbury spokesman Trevor Datson declined to comment as did Kraft spokesman Michael Mitchell.<\/p>\n Kraft must raise its bid by at least 10 percent to 850 pence to stand a chance of capturing the maker of Dairy Milk chocolate bars, a survey of nine Cadbury shareholders shows. Together they account for about 11 percent of the shares. Responses ranged from 800 pence to 900 pence.<\/p>\n Jeffrey Scharf, president of Scharf Investments in Santa Cruz, California, said 900 pence a share would be \u201ccompelling,\u201d while an offer in the \u201clow 800s\u201d may struggle. Scharf Investments has about 760,000 Cadbury shares.<\/p>\n Higher Multiple<\/p>\n \u201cIt\u2019s more than a little ironic that Kraft sold its pizza business to Nestle for a higher multiple than they are willing to pay for Cadbury\u2019s candy business,\u201d Scharf said. \u201cIt\u2019s not really a plausible, attractive offer.\u201d Nestle said it paid 12.5 times earnings for the unit.<\/p>\n Cadbury Chairman Roger Carr has repeatedly called Kraft\u2019s offer \u201cderisory.\u201d He said on Jan. 14 that Hershey Co. recently reaffirmed its interest in the company and would transform itself into a global business by trumping Kraft\u2019s bid.<\/p>\n Hershey, the Pennsylvania-based chocolate maker that\u2019s controlled by a charitable trust, was stepping up efforts last week to prepare a competing bid, people with knowledge of the matter said at the time. The company will make a decision on what to do after Kraft submits its final offer, the people said. The deadline for a Kraft bid is Jan. 19.<\/p>\n Kraft may be able to increase the cash portion of its offer without further negotiations with its lenders. In addition to a 5.5 billion-pound bridge loan it\u2019s getting from Citigroup Inc., Deutsche Bank AG, and seven other banks, it has an agreement to borrow $3 billion, according to a Dec. 4 filing with the U.S. Securities and Exchange Commission.<\/p>\n Yacktman, the Kraft investor, said that he\u2019s not opposed to a higher cash offer and thinks CEO Rosenfeld has left room to negotiate.<\/p>\n \u201cAs long as the economics are satisfied rather than the egos, then it\u2019s a good deal,\u201d Yacktman said.<\/p>\n –With assistance from Christine Richard in New York. Editors: Jennifer Sondag, Celeste Perri<\/p>\n Share Investor Links<\/span><\/a><\/a><\/p>\n Share Investor Blog<\/a> – Stockmarket & Business commentary Recommended Amazon Reading<\/span><\/p>\n<\/a>
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