Kraft faces tougher Cadbury pitch

LONDON/PHILADELPHIA (Reuters) - Kraft Foods (KFT.N) faces a tougher task winning over Cadbury (CBRY.L) shareholders after disappointing results reinforced the view that it will formalise its existing offer for the British chocolatier next week rather than present a higher bid.

An announcement formalizing Kraft's current offer is expected on Monday, under a deadline set by the UK Takeover Panel, one source familiar with the situation told Reuters. The source could not be identified by name because he was not authorized to speak with the media.

Kraft is unlikely to raise its offer or change the cash-and-stock mix of the bid at this time because it faces no rival suitors for Cadbury, said the source familiar with the situation, who cautioned that plans could still be altered, before or after Monday.

"Formalizing the bid is just a starting point," said the source. "Anything could change after that."

If Kraft failed to formalise its bid by 6 p.m. British time on Monday November 9, it would have to walk away from Cadbury for six months under UK takeover rules.

Kraft made a cash-and-shares offer in early September that was rejected by Cadbury. Formalizing the offer without a recommendation from Cadbury would turn the bid hostile.

The initial approach was priced at 745p a Cadbury share, or 10.2 billion pounds ($16.8 billion), but the fall in Kraft shares makes it presently worth around 733p, against a current Cadbury share price of around 767p.

Kraft released its quarterly results after the U.S. market close on Tuesday, reporting revenue that fell short of Wall Street expectations and cutting its sales forecast.

The world's No. 2 foodmaker has insisted it would not overpay for Cadbury. But it has also secured a $9 billion bridge loan and could use it to sweeten the cash element of its offer at a later date.

Kraft shares were down nearly 3 percent on Wednesday afternoon on the New York Stock Exchange, while Cadbury closed down 1.4 percent in London.

HOW MUCH SWEETER?

Pablo Zuanic at broker JPMorgan said Kraft's results were likely to cap any eventual improvement in its offer.

"Re: the Kraft bid, we now assume a lower price on lack of competing bids, lower synergy assumptions and our growing belief Kraft could walk away ... We doubt Kraft will go over 780 pence," he added.

Investec Securities, meanwhile, said it expects Kraft would not be willing to pay more than 800 pence a share for Cadbury.

"We now think Kraft will be willing to pay only 800p, and the probability of a successful bid falls accordingly," said analyst Martin Deboo at Investec Securities, one of the few big brokers not involved in advising or financing in the bid battle.

Graham Jones at broker Panmure Gordon said Kraft would be able to raise the cash portion of its bid to 400 pence a Cadbury share from 300 pence after raising $9 billion of bridge finance, but its lower share price wouldn't help its cause.

Although Kraft beat earnings expectations, it reported weaker than expected third-quarter sales and cut its full-year 2009 sales growth forecast to about 2 percent, from 3 percent previously.

Panmure's Jones pointed out that Kraft disappointed on sales growth for the fourth quarter in a row, with underlying sales only up 0.5 percent compared with Cadbury's impressive 7 percent third-quarter growth, as reported last month.

Other analysts said this matched Cadbury Chairman Roger Carr's description of Kraft as a "low-growth conglomerate business model," in a September letter to Kraft Chief Executive Officer Irene Rosenfeld rejecting Kraft's bid.

Investec's Deboo said he rates Cadbury's chances of remaining independent as high as 40 percent and puts a stand-alone value on Cadbury's shares at 750 pence. Since its pre-bid level of 568 pence, a rise in the stock market and earnings updates would support this value, Deboo said.

(Editing by Michele Gershberg and Gerald E. McCormick)