Kraft has sweetened its hostile bid for Cadbury yesterday but the US food giant's plans for a share issue to help pay for the deal were attacked by its biggest shareholder, Warren Buffett.
The new offer, still valuing Cadbury at £10.5bn, came after Kraft raised the cash component from the $3.7bn (£2.3bn) sale of its North American pizza business to Nestlé.
Cadbury dismissed Kraft's original proposal of 300p per share plus 0.2589 Kraft shares as "derisory", and yesterday repeated its scorn for the new 360p per share deal. "Kraft has once again missed the point," a spokesman said. "Despite this tinkering, the Kraft offer remains unchanged and derisory with less than half the consideration in cash."
The British confectioner found an unexpected ally in Mr Buffett, whose Berkshire Hathaway investment vehicle owns 9.4 per cent of Kraft. Cadbury executives say the Kraft offer fundamentally undervalues their business, and the man nicknamed the Sage of Omaha says it is equally bad for Kraft. Mr Buffett publicly condemned the Cadbury merger plan and said he would vote against the Kraft chief executive Irene Rosenfeld's plan to issue new 370 million new shares to fund it.
"Kraft stock, at its current price of $27, is a very expensive 'currency' to be used in an acquisition," Mr Buffett said. "In 2007, in fact, Kraft spent $3.6bn to repurchase shares at about $33 per share, presumably because the directors and management thought the shares to be worth more."
He also said a "yes" vote would give Kraft's management a "blank cheque" to pay whatever they want for Cadbury.
Though analysts remain divided about Kraft's chances of securing Cadbury, the row leaves the company – and its CEO – dangerously exposed. "Berkshire Hathaway is firing a shot across Kraft's bows, warning it not to ride roughshod over its own shareholders in the desire to get hold of Cadbury," said Jeremy Batstone-Carr, head of research at Charles Stanley. "If Kraft's attempts to give it the scope to raise its offer are vetoed, it is in trouble."
The implications for Ms Rosenfeld are even worse. Kraft has already suffered from Cadbury's repeated jibes that it is a low-growth conglomerate with few prospects, a criticism thrown into further relief by the sale of the fast-growing US pizza business. If the takeover fails, Ms Rosenfeld's strategy will be left in tatters.
"I would be surprised if she lasted a year if this deal doesn't go ahead," Mr Batstone-Carr added.
But Cadbury will also not escape unscathed. It will need to maintain the recent improvements in sales volumes and margins it has used to justify its rejection of a £10.5bn price tag.
Yesterday's developments did go some way to clarify Cadbury's future. Nestlé was tipped to make a counter offer – particularly after the sale of its Alcon eyecare business for £17.4bn on Monday. But after the Kraft acquisition, the Swiss group formally stepped out of the running. "After discussions with the UK Takeover Panel regarding the potential for further speculation in respect of Cadbury following Nestle's recent announcements, Nestlé confirms that it does not intend to make, or participate in, a formal offer for Cadbury," the company said.
Italy's Ferrero and US confectioner Hershey are still in the frame as possible bidders, but so far neither has made a formal approach. If the Kraft bid fails, neither is likely to pursue the matter further. "Everybody was trying to protect their own interests but if the Kraft deal doesn't go ahead then all bets are off," Mr Batstone-Carr added.
Crunch time: How the Cadbury saga is due to unfold
* The four-month tussle between Kraft and Cadbury will be resolved within weeks as a string of key deadlines expire. The first is 15 January – the last day that Cadbury can issue a trading update to bolster its claims that Kraft's £10.5bn bid is "derisory" and fundamentally undervalues the business.
* The Takeover Panel's deadline for Kraft to set out the details of its new proposal is 19 January. The US food company said yesterday that it would offer 360p per share in cash instead of the 300p per share originally proposed, but Kraft has not yet specified the reduced fraction of its shares to go with the updated offer.
* The deadline for Cadbury investors to accept the revised bid from Kraft is 2 February.
* 2 February is also effectively the last date for any other offers for Cadbury. The Swiss food conglomerate Nestlé yesterday ruled itself out of the bidding, but Italy's Ferrero International and the US confectioner Hershey may yet choose to get involved. Both companies have been the subject of much speculation but neither has yet made any formal bid.