Kraft Foods said it was intent on pursuing Britain's Cadbury , which soared in value after it snubbed a premium-rich bid from the U.S. group, reinforcing hopes of a broader-based pick-up in merger activity.

Analysts said North America's biggest food group might have to raise its 10.2 billion pound ($16.7 billion) offer by up to 40 percent after shares in the world's No.2 candy and chocolate maker increased by almost half on news of the approach.

The company's biggest institutional shareholder, Legal & General Investment Management, said in a statement that it thought the approach materially undervalued Cadbury, and supported management in opposing the deal.

According to Reuters Estimates, Legal & General has a 5.4 percent stake in the company.

Cadbury's stock closed up 38 percent at 783 pence, having peaked close to its all-time high at 808 and well ahead of Kraft's 745 pence-per-share pitch.

The price spike reflected analysts' views the combination would be a success, chances of a counterbid and bankers' hopes that rallying equity markets and a brighter economic outlook were encouraging companies to view mergers and acquisitions (M&A) prospects with greater confidence.

If the deal gets done, it sends a positive signal about the M&A market. There is not that much more consolidation to be done in confectionery, but a successful outcome would make global consumer companies more likely to pursue their own M&A targets, said a senior banking source.

The two firms' product portfolios are largely complementary.

Top brands at Cadbury, which had sales of 5.4 billion pounds ($8.8 billion) last year, include Bassett's Liquorice Allsorts, Maynards Wine Gums and trademark chocolate bars while Kraft, which had turnover of $42 billion, is known for Maxwell House coffee, Oreo cookies and Ritz crackers.

Kraft's cash-and-shares offer, outlined in a letter on August 28, represented a 31 percent premium to Cadbury's closing share price from last Friday.

Kraft said on a conference call it was comfortable it could fund the cash part of the proposal with existing cash and debt. A source familiar with the situation said that Kraft has already had some discussions about financing the cash component of the deal and did not foresee that getting financing would be problematic.

The timing of the proposal was partly driven by the improvement in the debt markets, particularly for investment grade financing, that source said, and the company's revitalization plan.

Kraft has been cutting costs and overhauling its portfolio over the past several years.


Our initial view is that this represents a competitively pitched offer, but something less than a knockout blow, said Investec analyst Martin Deboo.

For a useful comparison, we think that investors need to look as far back as Nestle's acquisition of Rowntree in 1988, where we recall that the exit premium was in excess of 100 percent of Rowntree's pre-speculation share price.

Panmure Gordon & Co recommended investors hold out for at least 800 pence a share and Bernstein Research suggested between 855 and 1,070.

One top 20 Cadbury investor who declined to be named said benchmarks set by other deals indicated Kraft would need to offer at least 10 percent more, and you could be looking at 20 to 30 percent higher.

Kraft offered 300 pence in cash and 0.2589 new Kraft shares per Cadbury share in the hope it can create a global powerhouse in snacks, confectionery and quick meals.

Consolidation hopes helped drive shares in the food and drink sector as a whole up 2.35 percent <.SX3P>, outperforming a 1.3 percent rise for European blue-chips.


Cazenove analysts said Nestle might make a counterbid for Cadbury, perhaps in a joint approach with U.S. chocolate group Hershey Co . Nestle CEO Paul Bulcke declined to comment directly but said the company had no major acquisitions planned though was always open to opportunities.

Hershey spokesman Kirk Saville declined comment on potential Hershey interest for Cadbury, citing company policy to not talk publicly about merger and acquisition issues.

Hershey and Cadbury have a licensing agreement that lets Cadbury sell some Hershey products, including York peppermint patties and Mounds candy bars worldwide, while Hershey makes Cadbury chocolates in the United States.

Hershey also has a licensing agreement with Nestle to make Kit Kat bars and Rolo candies in the United States.

The Wall Street Journal reported that Hershey Co. is unlikely to stand by and let Kraft or another company buy Cadbury, citing a person familiar with Hershey's thinking.

Hershey recognizes that Cadbury is the last major confectionery company potentially available and, as such, is likely to make some response to Kraft's... bid for Cadbury, the paper cited the person saying.

Cadbury said it believed Kraft's approach fundamentally undervalued the British company.

Northfield, Illinois headquartered Kraft said it was not ready to throw in the towel, however, describing itself as committed to working toward a recommended transaction and to maintaining a constructive dialogue.

We think (a deal) makes perfect sense ... subject to the right price for both parties, Bernstein analysts wrote.

A debt market source said Kraft was most likely to finance a bid with a bridge loan via the bond markets. We've seen sizeable acquisitions this year for Merck and Pfizer done this way, the banker said.

Global merger and acquisition activity fell 44.5 percent to $872.5 billion in the first half of 2009, according to Reuters data -- the lowest first half volume since 2003 and the steepest decline since 2001.

Lazard is acting as lead financial adviser to Kraft with Centerview Partners, Citigroup and Deutsche Bank also advising.

Goldman Sachs, Morgan Stanley and UBS are working with Cadbury, banking sources said.