updated 1/5/2010 3:16:07 PM ET 2010-01-05T20:16:07

Kraft Foods Inc.'s hostile bid for Cadbury PLC grew more contentious Tuesday as Warren Buffett's Berkshire Hathaway sternly warned against the deal, even as Kraft sweetened its offer.

Kraft plans to sell its North American frozen pizza business, whose brands include Tombstone and DiGiorno, to Nestle SA for $3.7 billion. It plans to use the proceeds to raise the cash share of its bid for British candy maker Cadbury.

Berkshire Hathaway, Kraft's largest shareholder, said later Tuesday morning that it voted against Kraft's proposal to issue shares to finance part of the $16.5 billion bid, saying it was worried it gave Kraft a "blank check" to raise the bid even higher. Buffett previously has said Kraft's prior offers were adequate for Cadbury.

Nestle, the world's largest food company, also declared it is not bidding for Cadbury, as some analysts had speculated.

Kraft remains the sole bidder for Cadbury, the maker of Dairy Milk candy bars and Dentyne gum. But the new offer and elimination of at least one potential suitor may not be enough assurance for Kraft shareholders, particularly after Buffett, one of the world's most influential investors, spoke out against the deal.

Kraft has until Jan. 19 to further raise its bid.

Feb. 1 vote
Kraft shareholders will know more by the time they meet Feb. 1 to vote on whether to issue up to 370 million shares in order to meet a new deadline of Feb. 2 to get Cadbury shareholder votes.

While Berkshire Hathaway, which owns 9.4 percent of the company's stock, can't squelch the deal with its vote alone, Buffett's influence may sway other shareholders and Kraft's management.

"We are listening to shareholders," said Kraft spokesman Michael Mitchell. "(Buffett) is certainly one of the most respected investors in the world, and we take his opinion seriously."

Berkshire said Kraft shares are already undervalued, and a deal structured around stock at this point could be risky. It said it would support an offer that does not destroy shareholder value.

Berkshire declined to comment further on its position or what type of deal might meet its approval.

"There are a number of institutional shareholders that might key off this and say it may be best to go with Warren on this," said Tim Ramey, an analyst with D.A. Davidson.

Kraft said the move was a response to Cadbury shareholders who want the security of more cash, and Kraft shareholders such as Berkshire who want the company to use less stock.

"We are obviously listening to shareholders," Mitchell said.

Kraft is interested in acquiring Cadbury to expand in the candy and gum businesses — particularly in emerging markets such as Mexico and India where Cadbury thrives.

And Kraft was happy to sell its pizza business to fund the deal because the company's focus is on expanding globally. The pizza business didn't work toward that because Kraft has no frozen-food distribution beyond the U.S., the company said.

Cash alternative
Kraft plans to use cash from the pizza sale, which it estimates to be 60 pence per Cadbury share, to fund a partial cash alternative to its offer. Kraft's previous offer was 300 pence in cash and 0.2589 Kraft shares for each Cadbury share.

Standard & Poor's Equity Research analyst Tom Graves said Kraft's willingness to boost the cash portion could be enough to acquire Cadbury. However, he expects Kraft will raise its offer in the next few weeks. While the deal may make strategic sense, he notes the benefit Kraft may see could be offset by the cost of the deal.

Cadbury dismissed the offer Tuesday as simple repackaging.

"Kraft has once again missed the point," it said. "Despite this tinkering, the Kraft offer remains unchanged and derisory with less than half the consideration in cash."

Cadbury Chairman Roger Carr said Kraft's offer is limited by powerful Kraft shareholders restricting the stock content and constrained by Kraft's rating agencies limiting how much cash it can put up.

Cadbury has staunchly opposed Kraft's offer, but its leaders have said it would be open to a deal that properly valued the company.

Some analysts say another suitor could emerge. Cadbury has said it has received expressions of interest from The Hershey Co. of the United States and Italy's Ferrero International SA, but no bids have materialized.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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