Members of Cadbury Plc's board have been talking with counterparts at Hershey Co as expectations fade for a significantly higher bid from Kraft Foods Inc .
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.
As they go through this process, they feel as though they want to have a management say in the organization and I think that they perceive that one of the suitors is better than the other, one of the sources said.
Hershey has struggled for weeks to decide whether to take the risk of bidding for a company more than twice its size. However, even if it does not make an offer, the specter of a rival adds pressure on Kraft, which has until January 19 to raise its offer.
At this point, the decision is in Hershey's court, according to a second source.
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.
Kraft has been betting against a rival bid emerging. On Tuesday the company 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 fell 0.9 percent to 771 pence on Wednesday, all but eliminating the premium between Cadbury's shares and the value of the Kraft bid, which stood at 769p per share.
For a graphic on the share premium: http:/graphics.thomsonreuters.com/0110/EZ_CBRY0110.gif
CADBURY: NO CHASE FOR WHITE KNIGHT
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.
Hershey and Cadbury had both been viewed as vulnerable since Mars Inc, the maker of M&Ms and Snickers, bought chewing gum maker Wm Wrigley Jr Co in 2008 to create the world's largest confectioner. A tie-up with Cadbury has been seen as Hershey's best chance to quickly move its business into faster growing markets outside of the United States.
Kraft said on Wednesday it had a 1.52 percent take-up from Cadbury shareholders for its bid by a first closing deadline of 1300 GMT on January 5.
It said the cash and shares bid, currently worth 769 pence per share, remained open until February 2. Investors are still hoping Kraft will improve the terms to 800 pence or more by January 19.
Kraft did receive some good news on its bid, with the European Commission giving conditional approval to the deal, as long as Kraft would divest Cadbury's Polish and Romanian chocolate businesses.
Hershey and Italy's Ferrero, which have both publicly expressed interest in Cadbury, have until January 23 to put in a competing offer.
Cadbury is expected to pre-release its 2009 results on January 12 and has until January 15 to give some further financial details.
(Reporting by Brad Dorfman. Writing by Michele Gershberg. Editing by Robert MacMillan and Tim Dobbyn)