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Kraft set to raise Cadbury offer, report

By Jane Byrne , 18-Jan-2010

Kraft Foods will raise its bid for Cadbury to at least 820 pence per share, according to a report in the UK’s Sunday Times.

The article, which did not reveal its sources, claims the new offer expected from the US group either today or tomorrow would value the British confectionery company at around £11.3bn, up from an existing offer of £10.2bn, which was rejected as derisory by Cadbury’s board.

Under takeover rules, Kraft has until tomorrow to raise its offer and then until 2 February to persuade Cadbury’s shareholders to accept it.

Kraft's chief executive, Irene Rosenfeld, held a number of meetings with Cadbury investors in London last week in a move to convince them of the merit of the group’s takeover bid.

But one of Kraft’s biggest investor’s, Warren Buffett, recently cautioned the chief executive not to overpay for the UK confectionery company

If Kraft failed to win over at least 50 per cent of Cadbury shareholders by then it would have to wait a year before it could bid again.

The US group recently sold its frozen pizza business to Nestlé to help sweeten its offer for Cadbury after Nestlé pulled out of the bidding for the manufacturer of brands such as Dairy Milk and Flake.

US company, Hershey, is also supposed to be gathering finance to fund a counterbid for Cadbury, which is one of the world's largest confectionery businesses with number one or number two positions in over 20 of the world's 50 biggest markets. The UK confectioner also claims to have the largest and most broadly spread emerging markets business of any confectionery company.

Independent model

Last week, Roger Carr, the chairman of Cadbury, said that the performance of Cadbury in 2009 underlines its track record of delivering improved results: “The Board has great confidence in both our growth prospects and the potential for creating further, material shareholder value as a pure-play standalone confectionery business".

And he said Cadbury’s second defence document also reiterated the further reasons why the company believes Kraft’s takeover offer was even more unattractive now than it was a few weeks ago:

Furthermore, Carr said that the offer, in that it mainly comprised Kraft shares, was also unappealing in light of Kraft’s unattractive business model and poor track record of delivery.

Competition rules

The European Commission said this month that the difference between British and continental European chocolate preferences means the acquisition of Cadbury by Kraft would not present competition problems, as long as Cadbury’s concerns in Poland and Romania were sold to a third party.

But Cadbury is the market leader in chocolate confectionery in the UK and Ireland, markets where consumers prefer British-style chocolate over ‘-continental tastes and where Kraft has a low market share.

British chocolate often uses vegetable fat instead of all cocoa fat, and tends to be sweeter and milkier than continental chocolate. Cadbury’s Dairy Milk brand is said to be particularly British in its appeal.

Kraft’s major brands in Europe are Milka, Cote d’Or and Toblerone. Since these are more in line with continental rather than British tastes, they are not deemed to be in direct competition with Cadbury’s brands.

The only markets that do pose a problem are Poland and Romania, where both companies have a large market share and their brands compete closely, especially in chocolate tablets. Kraft has therefore said it would sell Cadbury’s Polish business, marketed under the Wedel brand, and Cadbury’s domestic chocolate business in Romania.

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