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Kraft sells pizza unit to raise Cadbury cash

Kraft Foods agreed to sell a US pizza unit to Nestle for $3.7bn (€2.5bn), raising cash to improve its offer for Cadbury after Nestle ruled itself out of the bidding for the UK chocolate maker.

Nestle said today it won’t join a bid for Cadbury, while Kraft said it is offering more cash in place of shares after requests from some Cadbury shareholders that it do so.

The sale gives Kraft more firepower in its attempt to get Cadbury investors to accept its £10.6bn (€11.75bn) offer, and may hinder Hershey, which analysts had been speculating might team up with Nestle to bid for the maker of Dairy Milk chocolate.

Cadbury fell as much as 2.4pc in London trading as the chances of a bidding contest receded.

“It’s a one horse race now for Cadbury: It’s just Kraft,” said James Amoroso, a food industry consultant based in Walchwil, Switzerland. “It was touch-and-go already for Hershey. Now, forget it.”

Cadbury shares were down 12 pence, or 1.5pc, to 793 pence at 8:47am. That’s still 6.4pc more than the 742 pence value of Kraft’s offer because some analysts expect the bid to be raised to placate shareholders.

Kraft said it will use an amount equivalent to the net proceeds from the pizza sale, which it estimates to be 60 pence per Cadbury share, to fund a partial cash alternative to its offer for the chocolate maker.

Kraft also extended the deadline for shareholders to accept its bid until February 2, the last day in the 60-day timetable set by the UK Takeover Panel.

‘Not good enough’

“Raising the cash component by 60 pence is still not good enough -- the problem is the overall offer is still at a discount to Cadbury’s current share price,” said Warren Ackerman, an analyst at Evolution Securities in London.

Hershey doesn’t have enough cash to fund its own offer for Cadbury, according to Jon Cox, an analyst at Kepler Capital Markets in Zurich.

Hershey would still find it difficult to bid for the UK company even if it joined with Ferrero, the maker of Nutella spreads, he said.

“This raises the bar significantly for Hershey,” said Andy Lynch, who manages $1.8bn at Schroder Investment Management in London. “The great hope Cadbury investors had that Nestle would ride in on a white horse and save them will not materialize.”

Switzerland-based Nestle said the purchase of brands including DiGiorno and Tombstone will make it the world leader in frozen pizza with annual sales of 3bn francs (€2.02bn) from that product.

The food maker said it estimates the Kraft unit’s 2009 earnings before interest, tax, depreciation and amortization at $279m, and the purchase will boost its earnings per share in the first year after completion.

Nestle fell 15 centimes, or 0.3pc, to 50.80 Swiss francs at 9:47am in Zurich trading.