Kraft's failure to sweeten its original offer leaves Cadbury with no appetite for a deal

LONDON BRIEFING:UK confectionery firm is in no mood to be swallowed up in hostile takeover by food giant, writes FIONA WALSH

AFTER AN eight-week phoney war, the battle for control of Cadbury got under way in earnest this week as US predator Kraft launched its formal offer just hours ahead of a "put up or shut up" deadline imposed by the City's Takeover Panel.

The terms, when they finally came, were something of an anti-climax.

Despite Cadbury's vehement rejection of Kraft's informal approach in September, the US food giant is sticking to its initial bid formula, a shares and cash mixture that valued Cadbury at 745p a share, or £10.2 billion, two months ago. Since then, however, the combination of a slide in Kraft's stock price and the falling dollar has cut the value of the offer to 717p a share, or £9.8 billion.

Not surprisingly, it didn't take long for Cadbury, famous for its Dairy Milk brand, to reject the "derisory" deal, which it said failed to come even "remotely close" to the confectionery company's true value.

Now the phoney war turns into a war of nerves - and one that could drag on until mid-February. Under the City takeover code, Kraft has 28 days in which to post its offer documents to shareholders, after which the formal 60-day bid timetable is triggered. The US food giant has shown no inclination to rush so far and most analysts believe it will wait until the end of the 28-day period before publishing its documents.

By refusing to sweeten the terms even slightly, Kraft chief executive Irene Rosenfeld seems determined to establish her credentials as a tough negotiator. Her decision to play a long game is a risky one but it does give Kraft, whose brand names range from Oreo cookies to Toblerone and Philadelphia cream cheese, the flexibility to up its terms further down the line. It also gives Cadbury chief executive Todd Stitzer and his chairman Roger Carr, a veteran of hostile takeover bids, the chance to further polish their defence. They gave a flavour of this in their swift rejection statement after the bid was launched, dismissing Kraft as a "low-growth conglomerate".

The City is unanimous in the view that this bid will not secure victory for the US food group, already second in size to Nestlé. In the initial excitement surrounding the Kraft approach in September, some analysts were talking excitedly of a final take-out price for Cadbury approaching £10 a share. Now the consensus looks to have settled at about 850p, a figure that is unlikely to impress the Cadbury board but may well sway its shareholders, particularly as Kraft will make great play of the risk that Cadbury's price, currently comfortably above the offer terms, will plummet if the offer fails.

So far, there have been no signs of any rival bidders although Nestlé of Switzerland and the US Hershey group are both possibilities. Like Rosenfeld, though, any rival bidder will want to wait until later in the takeover timetable before showing its hand, unless it can agree a "white knight" deal with Cadbury that would force Kraft to table a more realistic offer or withdraw.

The decision to stick to the original terms will not have impressed leading Cadbury shareholders, such as Legal & General, its second-largest shareholder with just over 5 per cent, which has already dismissed the offer. But the Kraft chief executive also has her own investors to keep happy, chiefly Warren Buffett, Kraft's largest shareholder. The Sage of Omaha may have just splashed out $44 billion to take control of one of America's largest freight railway operators but he is notoriously parsimonious when it comes to buying companies. He has already said the original Cadbury terms were "pretty full" and will not want to see Kraft overpay. Kraft also runs the risk of seeing its credit rating downgraded, which would increase its borrowing costs, if it takes on too much debt to finance the deal.

So Rosenfeld needs to play a careful game. It is true that the longer the takeover plays out, the greater the chance of a market correction that would send Cadbury shareholders scuttling to accept the terms. But there's also the risk that the dollar and Kraft stock fall further still, making the bid even less attractive.

The recent lacklustre trading statement from Kraft was in stark contrast to Cadbury's upbeat update. Both companies are due to report on trading again during the offer period and another set of less than impressive figures from Kraft will only reinforce the feeling that it needs Cadbury more than Cadbury needs it.

Fiona Walsh writes for the Guardiannewspaper in London