Warren against Kraft's deal

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By Andrew Frye
Jan. 5 (Bloomberg) -- Warren Buffett, who worked behind the scenes to undermine Coca-Cola Co.’s bid for Quaker Oats 10 years ago, has gone public to rein in Kraft Foods Inc.’s Irene Rosenfeld in her quest to acquire Cadbury Plc.

Buffett’s Berkshire Hathaway Inc., Kraft’s biggest shareholder, said today that Rosenfeld was seeking a “blank check” and urged fellow investors to oppose her plan to authorize the issuance as many as 370 million shares. Northfield, Illinois-based Kraft, which has bid 10.6 billion pounds ($17 billion) for Cadbury, first announced its intention in September to buy the company.

“It’s unusual for Berkshire to put out any sort of comment like this publicly,” said Glenn Tongue, a partner at T2 Partners LLC, which holds investments in Omaha, Nebraska-based Berkshire and Kraft and doesn’t want the foodmaker to increase its bid. “As a shareholder I love seeing this because at the current offer this deal makes plenty of sense.”

Buffett, who has said shareholders need to act like owners, is calling for caution in negotiations after Cadbury said Kraft’s offer was insufficient. In publicly urging investors to join him, the 79-year-old Berkshire chairman is drawing on his power as a 9.4-percent owner of Kraft and the standing he’s gained in financial markets as the world’s preeminent investor.

“If he says no, everybody else is going to pile on and say no too,” said Justin Fuller, a partner at Midway Capital Research & Management who runs the buffettologist.com Web site.

Berkshire said it may support a Cadbury takeover if it concludes this month that the final offer “does not destroy value for Kraft shareholders.” Buffett didn’t immediately respond to a request for comment on what terms he would endorse.

‘Expensive Proposition’

“I don’t think that he’s opposed to the acquisition, I think he’s opposed to the use of stock,” said Gerald Martin, a finance professor at American University’s Kogod School of Business in Washington. “He feels that the shares are so undervalued that it would be an expensive proposition.”

Buffett won a global following as the “Oracle of Omaha” by profiting from investments in out-of-favor stocks and businesses. Berkshire, the biggest shareholder in Coca-Cola, American Express Co. and Wells Fargo & Co., used profits last year to buy stock in some of the world’s biggest companies, including Exxon Mobil Corp. and Kraft rival Nestle SA.

Buffett was the most vocal dissenter on Atlanta-based Coca- Cola’s board when directors met in 2000 to discuss a $15.3 billion bid by then-Chief Executive Officer Douglas Daft for Quaker Oats, the maker of Gatorade, Cap’n Crunch cereal and Rice-A-Roni. Buffett argued the price was too high because a stock swap proposed as part of the deal would give up more than 10 percent of Coca-Cola, board member James Williams said in a 2004 interview.

‘Very Scarce’

The board voted against the acquisition and PepsiCo Inc. bought Quaker Oats instead, completing the purchase in August 2001 for $14 billion.

“I’m not surprised that Berkshire would resist issuing shares,” said Tom Russo, partner at Gardner Russo & Gardner, which holds Berkshire, Cadbury and Vevey, Switzerland-based Nestle. Buffett “has had the longstanding belief that equity capital is very scarce.”

Rosenfeld, CEO at Kraft since 2006, is seeking to buy the U.K.-based maker of Creme Eggs and Trident gum to expand its business outside the U.S. Kraft raised the cash portion of the Cadbury bid today after agreeing to sell pizza brands including DiGiorno and Tombstone to Nestle, the world’s largest food company.

Cadbury fell 3.2 percent to 779 pence in London, the biggest drop in eight months. Kraft added 91 cents, or 3.3 percent, to $28.34 at 3:11 p.m. in New York Stock Exchange composite trading. That values Berkshire’s stake at more than $3.9 billion.

‘Very Expensive Currency’

Buffett said Kraft shares were “very expensive ‘currency’” after falling about 17 percent in the two years ended last week, and he criticized management for seeking to issue stock at current prices after repurchasing shares at $33 in 2007. Kraft executives “have to do a lot of things right to justify this price,” Buffett said in a September interview on CNBC.

“We agree that Kraft Foods shares are deeply undervalued,” the foodmaker said in a statement. “We intend to remain disciplined in this process.”

NEW YORK/LONDON (Reuters) - Warren Buffett came out against Kraft's (KFT.N) $16.8 billion hostile offer for Britain's Cadbury (CBRY.L) as a threat to shareholder value, undermining the U.S. foodmaker's attempt to woo investors with a sweeter bid.

Deals
Kraft Chief Executive Irene Rosenfeld had sought to grab Cadbury investors' attention by raising the cash portion of its bid on Tuesday. But the rare intervention by Buffett a few hours later showed she has yet to win over Kraft's largest shareholder and one of the world's most admired investors, as well as giving Cadbury new ammunition in its defense.

Buffett's Berkshire Hathaway (BRKa.N) said in a statement it was voting against Kraft's proposal to float 370 million shares to fund the Cadbury bid while the company's stock remains undervalued, calling it a request for a blank check from shareholders. The company holds 9.4 percent of Kraft.

Berkshire said it could reconsider its vote if convinced the bid does not destroy shareholder value. Kraft could also ultimately offer fewer shares.

"It's very unusual for Buffett to speak out like this," said Justin Fuller, an analyst who follows Berkshire for Midway Capital Research & Management and publishes the Buffettologist.com blog.

"Cadbury doesn't want to do a deal at this price and this resistance from Kraft's largest shareholder hurts the deal's chances of getting done."

Cadbury Chairman Roger Carr quickly seized on the Berkshire statement as a sign that Rosenfeld was being squeezed in her most ambitious gambit yet as CEO.

"Kraft talks about discipline in making their derisory offer but it's really about management weakness," Carr said in a statement. "Their offer is limited by powerful Kraft shareholders restricting the stock content and constrained by Kraft's rating agencies limiting the cash content."

A source familiar with the situation said Kraft had been in constant communication with its largest shareholder throughout the Cadbury bid process, and that Buffett was apprised of Kraft's position before the Tuesday announcement.

But it appeared that the two sides did not see eye-to-eye, prompting the Berkshire statement.
"If Buffett votes against something -- that carries a great deal of weight with other shareholders .... When he says no, no is what he says and means," said Jerry Bruni, CEO and portfolio manager of J.V. Bruni and Co, based in Colorado Springs, Co.

Kraft shares were up 3.5 percent Tuesday afternoon while Cadbury slipped 3.2 percent. Cadbury shares are trading about 3 percent higher than Kraft's current offer, down from a spread of about 10 percent on Monday.

NESTLE DEAL FUNDS REVISED KRAFT OFFER
Earlier, Kraft revised its 10.4 billion pound ($16.8 billion) bid, offering shareholders the option of an additional 60 pence cash per share for the maker of Dairy Milk chocolate and Trident gum.
The extra cash brings the cash portion to 360p and is funded from a deal whereby Switzerland's Nestle (NESN.VX) will buy Kraft's North American frozen pizza business for $3.7 billion. Nestle also ruled itself out of any bid war for Cadbury.

Rosenfeld has stuck to her guns since her initial approach to Cadbury late last summer, determined not to overpay and convinced that a rival bidder would not emerge. Some Buffett watchers believe she could yet bring the Sage of Omaha on board.

"I don't think he's throwing a monkey wrench in the deal. This is Warren Buffett 101," said Frank Betz, a principal at Carret/Zane Capital Management LLP and an owner of Berkshire shares who has played bridge with Buffett.

A Kraft spokeswoman said the company agrees its shares are "deeply undervalued," would remain disciplined and would not do anything that hurts shareholder value.

"He is our largest investor and one of the most respected investors in the world, so of course we take his opinion seriously," she said of Buffett.

Cadbury shares fell to 779p on Tuesday, compared with Kraft's cash-and-share bid value of about 758p. Many analysts and investors still expect Kraft will need to pay 800 pence per share or above to win over Cadbury.

KRAFT STILL A FRONT-RUNNER
Buffett's surprise announcement overshadowed news that a key rival to Kraft took itself, and possibly other suitors, out of the running.

"Nestle's decision effectively leaves Kraft as the overwhelming front-runner .... Nestle's decision effectively removes Ferrero and Hershey from the field as competitive forces," said analyst Jeremy Batstone-Carr at Charles Stanley.

U.S.-based Hershey (HSY.N) and Italy's Ferrero expressed interest in bidding for Cadbury in November, but they need to come up with fully financed bids by January 23 to succeed under British rules. Analysts had expected Nestle might team up with Hershey, while Ferrero was seen as needing financial help.

Kraft said it would give detailed terms of the alternative cash offer by a January 19 deadline under British takeover rules. The U.S. food maker also extended its deadline for Cadbury shareholders to accept its offer to February 2.

(Additional reporting by Raji Menon, Victoria Howley, Jessica Hall, Michael Erman, Sam Cage, Jessica Wohl and Aaron Pressman; Editing by Richard Chang)