LONDON - Warren Buffett's warning to Kraft over using its undervalued stock to bid for Cadbury may return to haunt Irene Rosenfeld as the Kraft CEO ponders an increased bid to win over the British confectioner.
The U.S. food giant formalised its low-ball bid earlier this week hoping that the lack of any counter bidder would pressure Cadbury shareholders into accepting its offer rather than see the share price of Cadbury fall sharply if Kraft walked away.
But analysts and investors say Kraft will need to raise its bid to stand any chance of success with a 50-pence plus gap between Cadbury's share price and the Kraft bid, and that sweetener is likely to be cash to win over shareholders.
And the closer to the day 46 deadline it gets, the likelier investors are to grab any raised offer, absent a counterbid.
Irene knows she can get Cadbury, it's a matter of waiting for expectations to come down. Then she will sweeten the deal with cash to get talks with them, said one banking source with knowledge of the bid situation.
Cadbury shares were trading up 0.3 percent at 777p by 1320 GMT, well above the 716p current value of Kraft's cash and shares bid. Many investors and analysts say it will need an 800p bid to win over Cadbury's shareholders.
She's had to play a hard game, with the tricky task of offering enough to get Cadbury to talk while not alienating her shareholde1rs, such as Buffett, the source added.
Buffett, the world's second richest man and a 10 percent shareholder in Kraft, warned Rosenfeld not to overpay for Cadbury in mid-September and raise doubts over whether Kraft had enough shareholder support to raise its bid significantly.
Anytime you're in a takeover, animal spirits run high and all of that. But Kraft has the disadvantage of using an undervalued stock, the highly influential Buffett -- known as the Sage of Omaha for his investment expertise -- said then.
Analysts say that Rosenfeld is likely to use Kraft's recent $9.2 billion loan to boost the cash element of its bid as issuing more new paper will undermine Kraft's share price.