Kraft says won't overpay for Cadbury as rev misses

Investors in both companies had hoped strong quarterly results would bolster the value of Kraft's initial $16.7 billion cash and stock proposal, but shares in the maker of Velveeta cheese and Oreo cookies fell 3 percent.

Clearly there has been a lot of speculation about what we can afford given these parameters, but as we said before, what we can afford is not relevant, Kraft Chief Executive Irene Rosenfeld said on a conference call. What is relevant is what Cadbury is worth, and that will guide our actions going forward.

Analysts had said Kraft may need to raise its offer for Cadbury to as much as 850 pence to 900 pence per share, from its original 745 pence per share proposal, to strike a deal.

But before Kraft reported results, sources familiar with the situation said the company was likely to stick by its initial offer when it issues a formal bid in time for a November 9 deadline set by the UK Takeover Panel. [ID:nL238518] Cadbury had rejected the proposal, first disclosed on September 7.

FOURTH STRAIGHT REVENUE MISS

The quarterly results mark Kraft's fourth consecutive quarterly revenue miss, although it beat analysts' earnings estimates and raised its full-year earnings outlook.

There was nothing in this earnings release to help their share price, and that's one of the currencies they are using in their bid for Cadbury, Edward Jones analyst Matt Arnold said. So, this does nothing to improve their Cadbury offer.

Rosenfeld also outlined her criteria for pursuing a deal with Cadbury, saying the world's second largest food company remained interested but would maintain a disciplined approach. Kraft can still deliver top-tier performance on its own, she said.

Our criteria include accretion to cash EPS in the second year, delivering a return on investment well in excess of our cost of capital, and maintaining both our investment grade credit rating and our dividend, she said.

Kraft's revenue fell 5.7 percent to $9.8 billion in the third quarter, due to the stronger dollar and lower pricing, in part because of lower commodity costs. Analysts on average forecast revenue $10.32 billion.

Organic revenue, which excludes the impact of currency fluctuations, acquisitions and divestitures, rose 0.5 percent.

Profit in the third quarter fell to $826 million, or 55 cents a share, compared with $1.36 billion, or 91 cents a share, a year earlier. Year earlier results included 57 cents a share in discontinued operations.

Analysts on average forecast 48 cents a share, according to Thomson Reuters I/B/E/S.

LOWER ORGANIC REVENUE VIEW

Kraft has seen earnings boosted by lower commodity costs even as strength in the dollar has weighed on revenue. Lower meat and dairy costs are cutting into pricing, the company said.

For all of 2009, Kraft now forecasts earnings per share of at least $1.97 a share, compared with its August 4 forecast of at least $1.93 a share. It forecast organic net revenue up about 2 percent, compared with its August forecast of up about 3 percent.

John Dowling, portfolio manager at Golub Group in San Mateo, Calif., said the light revenue was well offset by the fact that Kraft raised its earnings forecast.

The new EPS tells me they continue to execute on their plans, said Golub, whose fund has about 8,000 shares of Kraft.

Kraft shares were at $26.70 in after-hours trading, down from the New York Stock Exchange close of $27.54. Its offer for Cadbury was initially valued at 745 pence a share, or 10.2 billion British pounds ($16.7 billion), but has since dropped to 733.8 pence per share, or 10.03 billion pounds ($16.48 billion) based on Kraft's closing price on Tuesday.

(Additional reporting by Jessica Hall and Ross Kerber; Editing Bernard Orr)