Cadbury Investors Seen Spurning Kraft's Early January Deadline

Cadbury PLC (CBY, CBRY.LN) investors are doggedly holding out for a sweeter takeover offer from Kraft Foods Inc. (KFT) or another bidder, making it likely that Kraft will get few shareholder acceptances of its hostile bid by next week's deadline.

Kraft has set a deadline of Jan. 5 for its current offer, now valued at 741 pence a share, to be accepted by Cadbury shareholders. Several of the U.K. confectioner's investors say Kraft will likely have to go above 800 pence to attract interest.

"I don't know why people would tender into the [current] offer that is lower than the market price when they can just sell their shares in the market," said Roy Behren, a portfolio manager for Merger Fund, which focuses on merger arbitrage and holds Cadbury shares. "People are speculating that either Kraft will raise their bid or there will be a competing bid from either Hershey or Ferrero or potentially Nestle."

Cadbury's shares have recently been trading around 790 pence, well above Kraft's offer. Kraft can choose to extend the Jan. 5 deadline and is very likely to do so, a move that isn't unusual in such deals. More closely watched will be Jan. 19, the deadline for Kraft to raise its bid.

"I would speculate it will take in excess of 800 pence to obtain [Cadbury] shareholder support," Behren said. Behren said his fund started buying Cadbury shares after Kraft announced its bid and for now he is waiting "to see how the situation plays out." His fund wouldn't want to tender its shares at Kraft's current price.

Some 15% of Cadbury shares are held by hedge funds who bought shares or boosted existing stakes after Kraft made its bid. One hedge-fund manager who holds Cadbury shares, but asked not to be named, said Kraft came in low deliberately and no one--not even Kraft--expected Cadbury to accept that initial offer.

"Kraft has done a good job of managing expectations--the initial derisory offer has everyone talking about an increased bid of between GBP8 and GBP9 rather than upwards of GBP9," the hedge-fund manager said, declining to specify at what price he would tender shares. "Kraft can certainly afford to increase its offer without losing its investment-grade rating," he added.

The emergence of another bidder could change the game. Hershey Co. (HSY) and Italy's Ferrero SpA have said they are weighing their options on Cadbury, although neither has bid so far. Nestle S.A. (NSRGY, NESN.VX) has been silent so far.

Kevin Dreyer, an analyst at Gabelli & Co., said he isn't discounting the possibility of a bid from Hershey, but he believes the most likely end to the saga is Kraft increasing is offer and taking over Cadbury. Gamco Investors Inc. (GBL), which is affiliated with Gabelli & Co., holds shares of Cadbury, Hershey and Kraft.

"Hershey probably wants to put a counter bid, but it would be a stretch for them [financially] to put in something materially higher than Kraft," Dreyer said. He said he feels Kraft probably needs an offer of at least 800 pence to get Cadbury to come to the table for discussions and a price in the range of 850 pence to get a deal done.

Kraft didn't comment on the number of acceptances it has received or on speculation about a higher bid.

Another long-term investor agreed that Kraft's existing bid would be rejected but said he would sell for an increased bid of anything "beginning with an 8." The manager said all his clients had held Cadbury shares for well over a year and in some cases for as many as 20 years. "We'd be upset to see it go but, having bought in at just GBP5 in some cases, anything over GBP8 would do it," he added.

-By Anjali Cordeiro, Dow Jones Newswires; 212-416-2200; anjali.cordeiro@dowjones.com

-By Marietta Cauchi, Dow Jones Newswires; +44 207 842 9241; marietta.cauchi@dowjones.com

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