British candy maker Cadbury PLC rejected a renewed $16.4 billion (9.8 billion pound) hostile bid from Kraft Foods Inc. on Monday after the U.S. company refused to sweeten a previous offer.
Kraft's decision to keep the terms of its previously rebuffed cash-and-stock approach effectively means a lower offer for investors in London-based Cadbury because of a shift in the share prices of both companies.
The prospect of a tie-up has caused some consternation in Britain, where the 195-year-old Cadbury is a much-loved brand — its Dairy Milk is the country's top-selling chocolate bar.
Kraft, the maker of Oreo cookies, Nabisco crackers and its namesake cheese, argued that the proposed deal — though lower than the 10.2 billion pound offer on the table in September — "represents a substantial premium to the unaffected share price of Cadbury."
Analysts had said that Kraft, based in Northfield, Illinois, needed to improve that offer to have any chance of success in winning Cadbury, which also makes Green & Black's chocolate brand, Halls lozenges and Trident and Dentyne gum.
But Kraft instead retained its offer of 300 pence in cash and 0.2589 new Kraft shares. While that translated to a deal worth 745 pence per Cadbury share in September, a surge in Cadbury's share price since then leaves the value of the deal now languishing at 717 pence.
Cadbury's shares were trading far above that level on Monday, up 0.3 percent at 760 pence in afternoon trade. The stock initially dropped as much as 2 percent after Kraft's announcement, but soon began to inch up again, suggesting that the market believes that the U.S. company's move is only an opening gambit.
Kraft, which also makes Kenco and Maxwell House coffee and Toblerone chocolate, made its move with just three hours to go before a so-called "put up or shut up" deadline under British takeover law that required Kraft to make a formal offer or walk away for six months.
"We believe that our proposal offers the best immediate and long-term value for Cadbury's shareholders and for the company itself compared with any other option currently available, including Cadbury remaining independent," said Kraft Foods Chief Executive Irene Rosenfeld.
But Cadbury Chairman Roger Carr said that the British company was "an exceptional standalone business" with "strong iconic brands, a sharp category focus and an enviable geographic scope."
"Kraft's offer does not come remotely close to reflecting the true value of our company," he said.
A combination of the two would create a company that generates at least $50 billion in total revenue. Kraft is the largest food company in the U.S. and No. 2 worldwide to Nestle, which would keep its No. 1 position even if Kraft adds Cadbury.
Despite speculation of a bidding war when Kraft's initial approach was revealed in September, rival interest from the likes of U.S. candymaker Hershey Co. has yet to emerge and consumer goods group Unilever NV publicly ruled itself out last week.
Billionaire Warren Buffett, whose investment firm Berkshire Hathaway is the biggest shareholder in Kraft, had said the previous Cadbury offer was "pretty full."
Carr added that a tie-up involved "the unattractive prospect of the absorption of Cadbury into a low growth conglomerate business model."
Kraft reported a lower quarterly profit last week because of a big one-time gain a year ago and a 6 percent decline in revenue but still lifted its yearly earnings outlook.
Analysts have pointed out the advantage for Kraft of gaining Cadbury's strong foothold in emerging markets. The British company last month reported higher-than expected sales for the third quarter and also lifted its revenue forecast for this year to "around the middle" of its previous guidance of 4-6 percent growth.
Along with opposition from the Cadbury board, Kraft faces a band of vocal supporters of the British company's long-held independence.
Felicity Loudon, the granddaughter of former Cadbury Brothers managing director Egbert Cadbury, has also been an outspoken critic of any deal, saying she was "particularly saddened by the possibility of one of the last remaining British icons disappearing into an American plastic cheese company."
In an attempt to appease unions, Kraft has pledged to save some 500 jobs at Cadbury's Somerdale chocolate factory in Bristol, central England, reversing a decision by the British company's board to transfer production of chocolate at the plant to Poland.
But unions say they have not been given a detailed proposal on Kraft's commitment to chocolate making in Britain and point to the U.S. company's decision to shut its Terry's Chocolate Orange factory in York, northern England, four years ago, transferring production to eastern Europe.