Published: Monday, 2 Nov 2009 | 11:35 AM ET

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Kraft is likely to formalize its original offer for Cadbury over the next week, keeping a price increase off the table but in effect turning the bid hostile, said sources close to the matter.

Kraft will likely formalize its original offer to Cadbury in the next week, according to sources close to the deal.

The sources added that while a higher offer of 800 pence a share was still seen as the minimum to tempt Cadbury

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[CBY  Loading...      ()   ] to the negotiating table, Kraft

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[KFT  Loading...      ()   ] was willing to play the waiting game and keep any price increase for later.

Kraft's offer in early September was rejected by Cadbury, so a move to formalize this cash and shares offer at the same value, then worth 745 pence or 10.2 billion pounds ($16.7 billion), would not change Cadbury's position and turn the bid hostile.

The U.S. food giant believes there is no rival bidder for Cadbury and so is keen not to overpay. It has watched Cadbury's shares drift down from a high of 808.95 pence after Cadbury's upbeat third-quarter update on Oct 21 to trade around 777 pence.

"Kraft has wanted to engage with Cadbury but that seems unlikely, so formalizing the original bid seems the best starting point to take the bid battle forward," said one source close to the situation.

Kraft and Cadbury declined to comment.

Kraft reports its third-quarter earnings on Tuesday, and sources and analysts believe a formal approach will be made to Cadbury after that date and before the deadline on Nov. 9 set by Britain's Takeover Panel.

Since Kraft made its initial cash and stock offer, its shares have slipped making the bid worth 734 pence against a current Cadbury share price of 777 pence, up 0.8 percent.

Kraft is expected to post earnings of 48 cents a share for the third-quarter, up from 44 cents a year earlier, according to analysts' estimates compiled by Thomson Reuters I/B/E/S, and good results are expected to boost Kraft's shares and so strengthen its hand in the Cadbury bidding battle.

A formal bid is unlikely on Tuesday as Kraft is likely to want to talk to its investors and see its shares trading for a full day on the Wednesday. Therefore, the formal offer is likely on Thursday, Friday or even the following Monday.

Favorable Climate for Hostile Bids?

Bankers say it is not Kraft chief executive Irene Rosenfeld's style to raise a bid many times — better to wait and raise the offer later if stock market conditions justify it.

Bankers say the reopening of credit markets has facilitated an increase in hostile bids as it has given potential buyers access to financing, even if targets are often reluctant to sell because of better prospects next year.

A bid turns hostile under UK takeover rules when a target rejects an offer and the suitor appeals directly to shareholders. However, not all unsolicited bids remain hostile, because bidders have three months to sweeten their offers.

The British confectionery group led by chief executive Todd Stitzer is likely to reject any Kraft offer under 800 pence a Cadbury share with a "grey area" seen between 800-830 pence where a final deal between the two is likely to be struck, they said.

Last month, a top ten Cadbury investor told Reuters that a possible Kraft bid at 820p "certainly stacks up. And we would certainly look at that," while another investor Mario Gabelli said a bid could succeed if pitched around 820p.

"Any bid that starts with a 7 will be rejected by Cadbury, and we see the grey area for talks between 800-830 pence," said another source with knowledge of the situation.

Many analysts believe Kraft will be unwilling to bid more than 850p for Cadbury. Martin Deboo at Investec Securities says Kraft will struggle to fund more than 400p of the bid price in cash without the loss of their investment grade rating.

The Kraft bid is made up of 300p in cash and rest in new Kraft shares, and analysts have said the Rosenfeld will need to raise the cash element to attract Cadbury's shareholders.

Deboo believe that if no bid or competitive auction emerges then there is a downside risk to 750p for Cadbury shares.

"But we think that Cadbury shares have a good chance of trading at 840p 12 months from now if they can continue to deliver the goods," he said.

Once a formal bid is submitted, Kraft would have 28 days to send its offer document to Cadbury's shareholders, and then the standard 60-day British takeover offer period starts, meaning a bid conclusion may only come only into February next year.

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