Buffett sour on Kraft's candy deal

Warren Buffett, CEO of Berkshire Hathaway, addresses The Women's Conference 2008 in Long Beach, California October 22, 2008.

CHICAGO (Reuters) - Warren Buffett said Kraft Foods Inc's (KFT.N) proposed $19.6 billion acquisition of Cadbury Plc CBRY.L is a "bad deal" and questioned how Chief Executive Irene Rosenfeld chose to pay for it.

While Buffett said he does not plan to sell his stake in Kraft, shares of the company fell more than 2 percent as the U.S. food group came under pressure from its largest shareholder.

"Irene has done a good job in operations. I like Irene. I mean, I find her -- she's been straightforward with me, we just disagree," Buffett told cable business channel CNBC on Wednesday.

"She thinks this is a good deal, I think it's a bad deal. I think she's a perfectly decent person. She could be a trustee under my will. I just don't want her making this particular deal," he said.

The integration of Cadbury and meeting cost-cutting and revenue growth targets will be the key going forward for Rosenfeld, whose tenure as Kraft CEO will now be judged by the deal, analysts said.

But it will be months if not years before the market will be able to judge whether Rosenfeld or Buffett was right.

"It is going to take time for you to see how Cadbury shows up in the results, before you can see the traction they are either getting or not getting," Morningstar analyst Erin Swanson said.

Buffett's Berkshire Hathaway (BRKa.N) holds a 9.4 percent stake in Kraft, the world's second-largest food group.

On Tuesday, Kraft sealed a deal with Cadbury's board to buy the British chocolatier for cash and stock after a four-month long hostile takeover battle.

The final deal included more cash and fewer new Kraft shares after Berkshire said it would vote against an initial plan to issue up to 370 million shares.

In lowering the number of shares issued, Kraft no longer needs its shareholders to approve the deal.

"If I had a chance to vote on this, I'd vote no," Buffett told CNBC. "I think Kraft is still undervalued. I just don't think it is as undervalued as it was three weeks ago."

Kraft has canceled a planned February 1 meeting at which shareholders were to vote on issuing more stock for the deal.

Kraft also has increased its 5.5 billion pound bridge loan to 7.1 billion in relation to the deal, Reuters Loan Pricing Corp reported.

Kraft shares were down 2.3 percent at $28.74 after Buffett's comments.

DEAL PRICE DROPS AFTER BUFFETT SPEAKS

With Kraft shares down on Buffett's comments, the Kraft bid for Cadbury is now worth about 830 pence per share versus the 840p price announced on Tuesday. But Kraft shares are not expected to fall so deeply that they cause Cadbury shareholders to balk ahead of a February 2 deadline to accept the offer.

"Given that it has the backing and the blessing of the (Cadbury) board, we believe the deal is going to go through," Morningstar's Swanson said.

"He (Buffett) has said from the get-go, from when this was first announced in September, that it would be a challenging deal to undertake and that Irene would have to show discipline in her pursuit, so his stance really hasn't changed," Swanson said.

Kraft defended the Cadbury deal in response to Buffett's remarks.

"We respect his opinion," spokeswoman Perry Yeatman said. "He's one of our largest investors. We think this is a good deal for us. It transforms our portfolio for better long-term growth."

Another high-profile Kraft shareholder, Pershing Square's William Ackman, said he supported the deal on Wednesday, telling CNBC that Kraft paid a fair price for Cadbury.

While Buffett thinks that Kraft shares are worth less now than when the deal was announced, he doesn't believe they are as undervalued as they were three weeks ago.

"I have moved my valuation down but I started at a pretty high figure," Buffett told reporters outside a special Berkshire shareholder meeting to approve a stock split related to the company's takeover of railroad operator Burlington Northern Santa Fe Corp BNI.N.

Buffett also questioned Kraft selling its fast-growing pizza business to Nestle SA (NESN.VX) in a move that raised cash for the Cadbury deal.

"I feel poorer," Buffett said of the deals.

Separately on Wednesday, Fitch Ratings lowered its ratings on Kraft and Cadbury's debt to the lowest investment grade.

(Reporting by Brad Dorfman. Additional reporting by Jonathan Stempel; Editing by Michele Gershberg, Gerald E. McCormick, Dave Zimmerman)