NEW YORK/LONDON Warren Buffett opposed Kraft's $16.8 billion (10.4 billion pound) hostile offer for Cadbury as a threat to shareholder value, undermining the U.S. foodmaker's attempt to woo investors with a sweeter bid.
Kraft Chief Executive Irene Rosenfeld had sought to grab Cadbury investors' attention by raising the cash portion of its bid on Tuesday. But the rare intervention by Buffett a few hours later showed she has yet to win over Kraft's largest shareholder and one of the world's most admired investors, as well as giving Cadbury new ammunition in its defence.
Buffett's Berkshire Hathaway said in a statement it was voting against Kraft's proposal to float 370 million shares to fund the Cadbury bid while the company's stock remains undervalued, calling it a request for a blank check from shareholders. The company holds 9.4 percent of Kraft.
Berkshire said it could reconsider its vote if convinced the bid does not destroy shareholder value. Kraft could also ultimately offer fewer shares.
"It's very unusual for Buffett to speak out like this," said Justin Fuller, an analyst who follows Berkshire for Midway Capital Research & Management and publishes the Buffettologist.com blog.
"Cadbury doesn't want to do a deal at this price and this resistance from Kraft's largest shareholder hurts the deal's chances of getting done."
Cadbury Chairman Roger Carr quickly seized on the Berkshire statement as a sign that Rosenfeld was being squeezed in her most ambitious gambit yet as CEO.
"Kraft talks about discipline in making their derisory offer but it's really about management weakness," Carr said in a statement. "Their offer is limited by powerful Kraft shareholders restricting the stock content and constrained by Kraft's rating agencies limiting the cash content."
A source familiar with the situation said Kraft had been in constant communication with its largest shareholder throughout the Cadbury bid process, and that Buffett was apprised of Kraft's position before the Tuesday announcement.
But it appeared that the two sides did not see eye-to-eye, prompting the Berkshire statement.
"If Buffett votes against something -- that carries a great deal of weight with other shareholders .... When he says no, no is what he says and means," said Jerry Bruni, CEO and portfolio manager of J.V. Bruni and Co, based in Colorado Springs, Co.
Kraft shares rose 3.4 percent while Cadbury slipped 3.2 percent. Cadbury shares are trading about 3 percent higher than Kraft's current offer, down from a spread of about 10 percent on Monday.
Bid graphic: here
NESTLE DEAL FUNDS REVISED KRAFT OFFER
Earlier, Kraft revised its 10.4 billion pound bid, offering shareholders the option of an additional 60 pence cash per share for the maker of Dairy Milk chocolate and Trident gum.
The extra cash brings the cash portion to 360p and is funded from a deal whereby Switzerland's Nestle will buy Kraft's North American frozen pizza business for $3.7 billion. Nestle also ruled itself out of any bid war for Cadbury.
Rosenfeld has stuck to her guns since her initial approach to Cadbury late last summer, determined not to overpay and convinced that a rival bidder would not emerge. Some Buffett watchers believe she could yet bring the Sage of Omaha on board.
"I don't think he's throwing a monkey wrench in the deal. This is Warren Buffett 101," said Frank Betz, a principal at Carret/Zane Capital Management LLP and an owner of Berkshire shares who has played bridge with Buffett.
A Kraft spokeswoman 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.
Cadbury shares fell to 779p on Tuesday, compared with Kraft's cash-and-share bid value of about 758p. Many analysts and investors still expect Kraft will need to pay 800 pence per share or above to win over Cadbury.
KRAFT STILL A FRONT-RUNNER
Buffett's surprise announcement overshadowed news that a key rival to Kraft took itself, and possibly other suitors, out of the running.
"Nestle's decision effectively leaves Kraft as the overwhelming front-runner .... Nestle's decision effectively removes Ferrero and Hershey from the field as competitive forces," said analyst Jeremy Batstone-Carr at Charles Stanley.
U.S.-based Hershey and Italy's Ferrero expressed interest in bidding for Cadbury in November, but they need to come up with fully financed bids by January 23 to succeed under British rules. Analysts had expected Nestle might team up with Hershey, while Ferrero was seen as needing financial help.
Kraft said it would give detailed terms of the alternative cash offer by a January 19 deadline under British takeover rules. The U.S. food maker also extended its deadline for Cadbury shareholders to accept its offer to February 2.
(Additional reporting by Raji Menon, Victoria Howley, Jessica Hall, Michael Erman, Sam Cage, Jessica Wohl and Aaron Pressman; Editing by Richard Chang)