Cadbury is not only seeking a higher price than Kraft's $16.8 billion hostile offer, but also a merger partner that would let the British chocolatier have some say in a combined company, two sources familiar with the discussions told Reuters.
Hershey and Cadbury are already partners. They each hold the licenses to market the other's products outside their domestic markets. The family-built companies share other similarities, including a history of charitable involvement in their communities.
But Hershey has struggled to decide whether to take the risk of bidding for a company more than twice its size.
At this point, the decision is in Hershey's court, one of the sources said.
Kraft on Tuesday raised the cash component of its offer, without changing the price.
Within hours, it drew a rare public show of opposition from Warren Buffett's Berkshire Hathaway , its largest investor, over a proposal to float shares to fund the bid. The comments prompted a drop in Cadbury shares as investors questioned how much room Kraft had to sweeten its offer further.
Cadbury shares closed off 0.9 percent at 771 pence on Wednesday, all but eliminating the premium between Cadbury's shares and the value of the Kraft bid.
Cadbury said on Wednesday that the company was not looking for a white knight.
We are focused on delivering value to our shareholders and unless and until we have a credible offer that adequately reflects the strength of this business, there is nothing to comment upon, the company said in a statement.
A Hershey spokesman declined to comment.
(Reporting by Brad Dorfman. Writing by Michele Gershberg. Editing by Robert MacMillan)