Harsh words from sweet-toothed sage may sour Kraft's bid for Cadbury

LONDON BRIEFING:Warren Buffett has warned he will vote against Kraft's current plans to fund the deal, writes FIONA WALSH

IF THE Sage of Omaha, who is known for his sweet tooth, has not already received a consignment of Creme Eggs from Cadbury, one must surely be winging its way to Nebraska in the post.

For a few brief hours yesterday morning, the British confectionery group’s chances of retaining its independence seemed to have taken a serious knock as hostile US bidder Kraft pulled off a nifty deal with Nestlé.

By lunchtime, however, it was Kraft on the backfoot as Warren Buffett weighed in. Having warned Kraft some weeks ago against overpaying, the world’s second-richest man went further yesterday, declaring that his Berkshire Hathaway investment vehicle would vote against Kraft’s plans to issue 370 million shares to help fund the Cadbury deal.

In what amounted to a stinging attack on the Kraft board, the billionaire investor said approving the new shares would be akin to giving the company “a blank cheque”, allowing it to change its offer to Cadbury in any way it wanted. At their current price of $27 (€18.80), Kraft shares were, he said, “a very expensive currency” to be used in an acquisition.

It is rare for Buffett to publicly criticise any of his own investments but he went on to question the Kraft board’s 2007 stock buyback, which was pitched at $33 a share. “Does the board now believe those purchases were a mistake and that Kraft’s true value is only the current price of $27 per share – and that it is therefore fine to structure a major acquisition based upon that price?” he asked.

With his legendary stock- picking skills and unrivalled track record, markets around the world sit up and listen when the Sage speaks. But as the largest single shareholder in Kraft, with just over 9 per cent of its stock, his words carry even more weight in the £10.3 billion battle for Cadbury.

Buffett’s public warning shot was sparked by a clever little deal unveiled earlier in the day by Kraft. It announced the $3.7 billion sale of its North American pizza business to Nestlé, which had been widely tipped as a rival bidder for Cadbury. Nestlé has now firmly ruled out launching its own offer or even taking part in a consortium bid for Cadbury.

Thus Kraft cut off at least one possible escape route for maker of Milk Tray and Creme Eggs – and at the same time raised almost $4 billion to sweeten its terms.

In a move to appease those Cadbury shareholders who think the paper element of its offer is too high, Kraft said it would use the proceeds of the pizza sale to add another 60p to the cash portion of the offer, taking it to 360p. The overall terms, at 740p a share, remain the same.

But the move, which initially won plaudits in the City, has clearly backfired. Nebraska-based Buffett certainly was not impressed. Far from proving a sweetener, the rejigged terms from Kraft served to make him fearful that there could be additional changes, he said, hence his decision to vote against the issue of new shares. He urged other investors to follow his lead.

Buffett did allow himself some wiggle room: if he is satisfied that Kraft’s final offer for Cadbury, which must be tabled by January 19th, will create value for Kraft, then he will give his approval.

The intervention of the billionaire investor has made a difficult decision for Kraft even tougher. The maker of Oreo cookies and Philadelphia cheese pulled off a neat move by getting Nestlé to rule itself out as a rival bidder while also stumping up almost $4 billion to boost its bid funds. But in the process the Kraft board unsettled its biggest shareholder, which is never a wise move, particularly when that shareholder is Buffett.

The day certainly ended better for Cadbury than it had begun yesterday, although the 185-year- old company is not safe yet. Even after Nestlé’s exit, there remains a couple of potential bidders on the sidelines – the American Hershey group and Ferrero of Italy – who have just over a fortnight left to make their own moves.

If they fail to come through, the Kraft deal, now with its near- 50 per cent cash element, will undoubtedly start to look sweeter to some Cadbury shareholders, although a number have insisted they will not accept anything less than 800p a share.

But will they stay firm if Kraft, mindful of Buffett’s stinging warning, decides to play hardball and refuses to raise?

Fiona Walsh writes for the Guardian newspaper in London