Buffett Warns Kraft Over Cadbury

Says already offering to much; Nestle won't pursue confectioner

OMAHA -- Warren Buffett's Berkshire Hathaway Inc. issued a stern warning to Kraft Foods CEO Irene Rosenfeld, according to a Reuters report, saying it opposed the food maker's plan to float new shares in pursuit of U.K. confectioner Cadbury Plc. It was the strongest statement yet by Berkshire Hathaway questioning Kraft's hostile 10 billion pound ($16 billion U.S.) cash and stock offer for the confectioner.

Berkshire Hathaway is Kraft's single largest shareholder, with a 9.4% stake in its own holdings and its pension funds. Kraft shares rose 3.5% after the Berkshire statement, [image-nocss] while Cadbury fell 3.3% on concerns opposition by Buffett would severely constrain a deal.

Berkshire said it voted against Kraft's proposal to issue up to 370 million shares to help the food maker buy Cadbury, but could reverse to a "yes" vote, depending on the final offer's details. Berkshire declined to elaborate further about the statement.

It said the proposal, if carried out, would give Kraft a "blank check" allowing it to change its offer for Cadbury.

Earlier on Tuesday, Kraft raised the cash portion of its offer to Cadbury shareholders, helped by a $3.7 billion deal to sell its North American frozen pizza business to Nestle (see related story; after discussions with the U.K. Takeover Panel, Vevey, Switzerland-based Nestle SA confirmed that it does not intend to make or participate in a formal offer for Cadbury, as had been rumored.)

Kraft cited in part concern by its own investors over using undervalued company shares as currency.

"We worry very much that, indeed, there will be an additional change from the revision announced this morning," Berkshire said in its statement. (Click the Download Now button below to read the full statement.)

Buffett had already warned Kraft against paying too much for Cadbury, and investors said the new statement was a clear signal to Rosenfeld to tread carefully.

"If Buffett votes against somethingthat carries a great deal of weight with other shareholders," Jerry Bruni, CEO and portfolio manager of J.V. Bruni & Co., told Reuters. "When he says no, no is what he says and means."

But some shareholders said the statement leaves Rosenfeld with room to maneuver. "I don't think he's throwing a monkey wrench in the deal. This is Warren Buffett 101," Frank Betz, a principal at Carret Zane Capital Management LLP and an owner of Berkshire shares who has played bridge with Buffett, told the news agency.

"He's often used the representation that one certainty is that people are going to continue to want to eat Dilly Bars," Betz said, referring to Dairy Queen ice cream bars. "By golly, if they are going to want to be eating dilly bars far into the future they are sure going to want to be eating Cadbury milk chocolate."

A Kraft spokesperson said the company agrees its shares are "deeply undervalued," would remain disciplined and would not do anything that hurts shareholder value. "He is our largest investor and one of the most respected investors in the world so of course we take his opinion seriously," she said of Buffett.

Berkshire Hathaway said it does not believe any Kraft shareholder should vote "yes" to the proposal without knowing what they are voting for; however, it said that it would change its own vote from "no" to "yes" if, after seeing the final offer Kraft is expected to present later this month, it concludes that the offer does not destroy value for Kraft shareholders.

Back in September, Buffett warned Kraft not to overpay for Cadbury, saying: "Any time you're in a takeover, animal spirits run high and all of that. But Kraft has the disadvantage of using an undervalued stock."

"Using undervalued shares does make the deal more expensive," Morningstar analyst Erin Swanson told Reuters. "So while we agree with that, Berkshire's vote may not be enough to block a deal for Cadbury. It is definitely a pointed message about the unfavorable position that Berkshire holds regarding Kraft's pursuit of the confectionary firm."