Cadbury deal likely to come with Buffett flavor

NEW YORK/PHILADELPHIA Thu Sep 17, 2009 7:58pm EDT

Billionaire financier and Berkshire Hathaway Chief Executive Officer Warren Buffett plays a game of bridge with ''Warren Buffet'' playing cards during the shareholders annual meeting in Omaha, Nebraska May 3, 2009. REUTERS/Carlos Barria

Billionaire financier and Berkshire Hathaway Chief Executive Officer Warren Buffett plays a game of bridge with ''Warren Buffet'' playing cards during the shareholders annual meeting in Omaha, Nebraska May 3, 2009.

Credit: Reuters/Carlos Barria

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NEW YORK/PHILADELPHIA (Reuters) - Warren Buffett is probably not trying to be Warren Wonka, but the Oracle of Omaha is certainly in a position to influence the struggle for control of the global chocolate industry.

Buffett -- like the fictional book and movie character Willy Wonka who owned a magical chocolate factory -- knows candy.

His Berkshire Hathaway Inc is the largest shareholder in Kraft Foods Inc, which made an unsolicited -- and rebuffed -- $16 billion bid for Cadbury Plc.

And now the trust that holds voting control of Hershey Co has hired Buffett's favorite banker, Byron Trott, as it also weighs whether to pursue the British chocolate maker, according to the Wall Street Journal on Thursday.

Trott, a former Goldman Sachs banker who runs his own firm now, is known for his expertise in candy as well as in advising family and trust-owned companies. He convinced Buffett to pay $6.5 billion to help finance Mars Inc in its $23 billion takeover of Wm Wrigley Jr Co last year.

While Trott's latest engagement may not have anything to do with Buffett, he may end up helping the billionaire investor even without trying.

Sources previously told Reuters Hershey is unlikely to make a bid on its own for all of Cadbury, which makes Dairy Milk chocolate, Halls cough drops and Trident gum.

But Hershey may want to pick up pieces of Cadbury, which could bode well for Buffett, some investors said.

Cadbury shareholders could get better value and Kraft may not have to pay up for a deal if a third party values some pieces of the British company more than what it is worth in its entirety to Kraft, these experts said.

"He wants to make sure, I suspect at some point, that Kraft gets good value for whatever money they spend," said Thomas Russo, a partner at Gardner, Russo & Gardner, which manages about $3 billion and owns Berkshire and Cadbury stock.

"One of the ways that Cadbury would go at the high price that it deserves for its franchise right now would be if pieces of Cadbury went to different buyers," Russo said. "This interest in making sure that one buyer doesn't overpay for the whole if the pieces can be sold separately I think is part of the equation right now."

He has made no secret of his worry that Kraft may overpay for the British chocolatier. On Wednesday, he told CNBC Kraft had "a lot to do" to justify the price offered for Cadbury. He also said investors undervalued Kraft's stock, so it was using a weak currency to pay full value for Cadbury.

FOOT IN THE DOOR

For Hershey, this may be an opportunity to pick up pieces like parts of Cadbury's international chocolate or U.S. gum businesses.

The trust's seriousness is evident from Trott's engagement and the hiring of boutique banking firm Watch Hill Partners as advisers, the Journal said on Thursday.

"This may be a way for Hershey to get its foot in the door and pick up some assets that might get shed along the way if Kraft and Cadbury do merge," said a consumer banker who declined to be named because he was not authorized to speak with the media.

Having Hershey in the fray could work in Kraft's favor as well. Partnering with Hershey would eliminate a bidding rival and give Kraft extra room to raise its bid if required without jeopardizing its credit rating, investment bankers said.

To be sure, Kraft, whose products include Kool-Aid, Oreo cookies and Oscar Mayer meats, may not want to sell any part of Cadbury. It may also not need any help to buy Cadbury.

Despite Kraft's view, Buffett is evidently not happy with the offer as it stands.

"He hates the practice of CEOs overpaying, particularly with their own stock when it is undervalued," said James Armstrong, president of Henry Armstrong Associates, which manages some $400 million and owns Berkshire stock.

"It's pretty clear that he doesn't think it's a very attractive acquisition at this price."

(Reporting by Paritosh Bansal and Jessica Hall; editing by Andre Grenon)

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