Published: Wednesday, 4 Nov 2009 | 12:31 AM ET

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Kraft Foods said it would not overpay for British chocolatier Cadbury on Tuesday after disappointing investors by posting weaker-than-expected quarterly revenue and cutting its
full-year sales forecast.

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 2.5 percent after-hours.

"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, referring to her resolve to maintain a disciplined approach to the deal.

"What is relevant is what Cadbury is worth, and that will guide our actions going forward," she said.

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. Since then, some investors have told Reuters that a Kraft bid closer to 820 pence per share could succeed as no counteroffer has emerged.

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 Nov. 9 deadline set by the UK Takeover Panel.

Cadbury had rejected the proposal, first disclosed on Sept. 7.

Its offer for Cadbury has dropped to 733.8 pence per share, or 10.03 billion pounds ($16.48 billion) based on Kraft's closing price on Tuesday.

Cadbury declined to comment on Kraft's results.

Kraft Secures Higher Financing

Rosenfeld said Kraft continues to talk with shareholders from both companies about a possible bid and also that it is discussing potential financing options.

Reuters Loan Pricing Corp. reported on Tuesday that Kraft has arranged $9 billion in financing for a bid, well above the $6.74 billion in cash indicated in the initial proposal for Cadbury, citing bankers familiar with the arrangement.

Shifting to more cash could make Kraft's offer more attractive to Cadbury shareholders, even if the total value of the offer was not increased, an analyst said.

"To increase the cash portion, I believe would definitely be favorable in the eyes of Cadbury shareholders," Morningstar analyst Erin Swanson said.

Both Cadbury and Kraft shareholders see the strategic logic in a potential deal, Rosenfeld said in an interview.

"As you might expect, Cadbury shareholders are interested in maximizing price, and Kraft shareholders want us to maintain financial discipline," she told Reuters.

Rosenfeld again outlined her criteria for pursuing a deal with Cadbury, and said Kraft can still deliver top-tier performance on its own.

"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.

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."

Kraft revenue fell 5.7 percent to $9.8 billion in the third quarter, due to a stronger dollar and the company's decision to pass on lower costs for commodities like dairy and meat to consumers. Analysts expected revenue of $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.

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

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