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Kraft Said to Near 12 Billion-Pound Cadbury Takeover

Jan. 19 (Bloomberg) — Kraft Foods Inc. is nearing an agreement to buy Cadbury Plc after raising its offer 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.

Cadbury investors would get 840 pence a share, including 500 pence in cash and the rest in stock, under the new offer, said the people, who declined to be identified because the talks are private. Cadbury would also pay its holders an additional 10-pence dividend, the people said. The offer is about 9 percent higher than Kraft’s previous bid of 769 pence. Cadbury closed at 808 pence yesterday.

Kraft Chief Executive Officer Irene Rosenfeld increased the original bid after Cadbury rejected it as “derisory” and Hershey Co. prepared to mount a rival offer. A purchase by Kraft 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.

The companies may announce a deal as early as today, the people 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.

Price Discipline

Hershey is unlikely to top Kraft’s offer, two people familiar with the matter said. Kirk Saville, a spokesman for the Pennsylvania-based candy maker, declined to comment.

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.

Rosenfeld faced pressure from her own shareholders to get the price right. Billionaire investor William Ackman last week joined Warren Buffett, Kraft’s biggest shareholder, in saying Kraft risked 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.”

Ackman’s Pershing Square Capital Management LP bought a $950 million stake in Kraft, or 2 percent of the company, Ackman said in a Jan. 15 interview. A purchase of Cadbury makes “tremendous sense,” he said.

Kraft advanced 46 cents to $29.58 in New York Stock Exchange composite trading on Jan. 15. Based on that price, the original bid of 300 pence in cash and 0.2589 Kraft share was more than 60 percent stock. The new offer consists of 40 percent stock and 60 percent cash. Kraft shares didn’t trade yesterday because of a holiday in the U.S.

If Kraft reduces the number of shares it plans to issue to less than 20 percent of its current shares outstanding, it no longer needs to have the deal approved by its own shareholders. Kraft had scheduled a special Feb. 1 investor meeting to consider the matter, and Berkshire Hathaway had already voted its shares against the proposal.

Pizza Sale

Kraft said earlier this month that it would sell pizza brands including DiGiorno and Tombstone to Nestle SA and use proceeds from the $3.7 billion deal to boost the cash component of its bid. At the time, it offered investors the option to substitute an additional 60 pence of shares with cash.

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.

Lazard Ltd., Centerview Partners, Citigroup Inc., and Deutsche Bank AG are advising Kraft on the deal. Cadbury is using Goldman Sachs Group Inc., Morgan Stanley, and UBS AG.

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.

Most Powerful

Cadbury CEO Todd Stitzer embarked on a week-long blitz in London and New York in December to persuade Cadbury shareholders not to accept Kraft’s offer, then worth about 733 pence a share. Rosenfeld also met with investors and said on a November earnings call that Kraft is well positioned for “top-tier performance” with or without Cadbury.

Some analysts had projected the U.K. company would fetch 900 pence a share after Kraft disclosed its offer in September. Those estimates began to drop when Kraft made its offer formal Nov. 9 without raising the bid and no competitors emerged.

Rosenfeld, 56, spent more than 25 years at Kraft, with a two-year interruption in 2004 to run PepsiCo Inc.’s Frito-Lay snack-food unit. Last year, Forbes magazine ranked her No. 6 on its list of the world’s most powerful women, three behind PepsiCo CEO Indra Nooyi.