Kraft sweetened its $16.8 billion offer for Britain's Cadbury and a potential rival stood aside, but just hours later the U.S. food firm's influential top shareholder threatened to vote against the deal.
Switzerland's Nestle ruled itself out of any bid war as Kraft, North America's biggest food group, raised the proportion of cash in its hostile bid -- an attempt to sway shareholders in the British chocolate maker.
The plan appeared to give Kraft the upper hand, but then 9.4 percent shareholder Warren Buffett weighed in to warn he may vote against the deal, sending Cadbury shares lower and Kraft stock higher.
Buffett's Berkshire Hathaway Inc investment group said it had voted no to Kraft's proposal to issue up to 370 million new Kraft shares to help fund a Cadbury takeover, but may change its vote if it concludes that the offer does not destroy value for Kraft shareholders.
The highly influential Buffett -- known as the Sage of Omaha for his investment expertise -- said Kraft's share issuance proposal gives it a blank check allowing the group to change its offer for Cadbury..
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.
Earlier, Kraft revised its 10.4 billion pound ($16.8 billion) bid, adding 60 pence cash per share to the offer to tempt shareholders in the maker of Dairy Milk chocolate and Trident gum, but cut the stock portion of the bid accordingly.
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.
Kraft's CEO Irene Rosenfeld has stuck to her guns since her initial approach to Cadbury in early September, determined not to overpay, and convinced that a rival bidder would not emerge and Cadbury's share price would drift down, analysts said.
Cadbury renewed its rejection of the Kraft takeover bid, once again calling it derisory, and its chairman Roger Carr since his meeting with Rosenfeld last summer has led a frosty defense as he saw no reason to hold talks with Kraft.
Cadbury shares fell after Nestle, the world's biggest food group, said it did not intend to make, or participate in, a formal offer for the British confectioner, and then dropped further after the Buffett's warning.
They slipped as low of 760p before trading off 3.3 percent at 779p by 11:20 a.m. EST (1620 GMT) compared with Kraft's cash-and-share bid which valued Cadbury shares at 758p, with the bid premium narrowing to 2.7 percent from nearly 10 percent on Monday.
Kraft shares rose 3.4 percent to $28.37, reflecting views that there is less chance of a competitive auction.
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.
Many analysts and investors still expect Kraft will need to pay 800 pence per share or above to win over Cadbury.
The (Nestle) decision not to pursue Cadbury was always clear despite market speculation to the contrary. Now it's in the open, said independent analyst James Amoroso. The Cadbury race is a one-horse race. Now Kraft has some more cash to put behind the bid.
Kraft said the move was made because of the desire expressed by some Cadbury security holders to have a greater proportion of the offer in cash and because some of its own shareholders had asked it to use fewer Kraft shares.
Cadbury was defiant.
Kraft has once again missed the point. Despite this tinkering, the value of the Kraft offer remains unchanged and derisory with less than half the consideration in cash, a spokesman told Reuters.
Kraft said it would give detailed terms of the alternative by January 19, the last day it is allowed to amend its offer under British takeover rules. The U.S. food maker also extended its deadline for shareholders to accept its offer to February 2.
Cadbury shareholders have said in the past that a bigger cash portion would help, but one investor was unimpressed by the new proposal on Tuesday.
This doesn't really change anything. It was never really the form of the deal that was the problem, it was always the price, said a top 20 Cadbury investor.
Nestle said the frozen pizza business it was buying from Kraft - which had 2009 sales of $2.1 billion and includes the DiGiorno, Tombstone and Jack's brands - would boost its earnings per share in the first full year of ownership and that synergies, at an estimated 7 percent of sales, would be fully realized within five years.
Nestle's acquisition of the Kraft pizza business is certainly not a cheap one, said Richard Withagen, analyst at SNS Securities who has a 'reduce' rating on Nestle shares and a price target of 44 Swiss francs. While the company has a strong track record in realizing synergies, it needs them to make this deal value accretive.
(Additional reporting by Raji Menon, Victoria Howley and Jessica Hall)
(Writing by Paul Hoskins and David Jones and Sam Cage in Zurich; Editing by Andrew Callus and Erica Billingham)