Warren Buffett weighs into Kraft's battle for Cadbury

Respected US investor Warren Buffett threw a spanner into Kraft's £10bn bid for UK confectionery group Cadbury today when he revealed his investment vehicle, Berkshire Hathaway, would vote against Kraft's plans to take over the firm until he knew what Kraft was planning to pay.

Berkshire Hathaway, which speaks for 9.4% of Kraft said that it has voted "no" to Kraft's proposal to issue up to 370m new shares to help pay for Cadbury which is chaired by Roger Carr. It is calling for other Kraft shareholders to follow its example at a special meeting due in February.

The explosive statement from Buffett said that using Kraft stock to pay for Cadbury when it was trading at only $27 a share made it a very "expensive currency" to be used in an acquisition.

But Berkshire Hathaway gave itself the flexibility to change its mind if Kraft's final offer for Cadbury on 19 January is pitched at a level that "does not destroy value for Kraft shareholders". If that happened, "we will change our vote to yes".

Kraft is proposing to pay for Cadbury via a mix of shares and cash. Buffett chose to make his statement on the day that Kraft announced that it would sweeten its proposed offer for the British firm by adding a larger cash component.

The extra cash is provided by Swiss food company Nestlé which is buying Kraft's frozen pizza business in the US and Canada for $3.7bn (£2.3bn).

Nestlé, the maker of Nescafe, KitKat and Ski yoghurts also declared today that it "does not intend to make, or participate in, a formal offer for Cadbury". This follows discussions with the Takeover Panel, which regulates merger activity in Britain.

Some City experts had speculated that Nestlé was gathering a war chest to unleash on Cadbury, after it raised $28bn (£17bn) in cash yesterday through the sale of its stake in an eye-care group, Alcon.

Kraft, led by Irene Rosenfeld, is able to offer nearly 50% of its 740p a share bid for Cadbury via cash after the frozen pizza sale, but the British firm's shareholders seemed unimpressed. "This changes nothing," said one.

The US company said: "Kraft Foods is doing this (adding more cash) because of the desire expressed by some Cadbury security-holders to have a greater proportion of the offer in cash and because Kraft Foods shareholders have expressed a desire for Kraft Foods to be more sparing in its use of undervalued Kraft Foods shares as currency for the offer."

Cadbury, though, refused to be swayed from its opposition to Kraft's bid, which is worth about £10.3bn, or 740p per Cadbury share.

"Kraft has once again missed the point," said a Cadbury spokesman. "Despite this tinkering, the Kraft offer remains unchanged and derisory with less than half the consideration in cash."

Shares in Cadbury fell by more than 3% on Tuesday to 779p.

The panel has set today as the initial deadline for Cadbury shareholders to say whether they will support Kraft's offer. But the vast majority of investors are expected to sit tight and see whether Kraft improves its offer. Cadbury has until 15 January to release new information to bolster its defence to the takeover, while Kraft faces a deadline of 19 January if it wants to raise its offer. Other interested parties – potentially Italian firm Ferrero or Hershey of the US – have until 23 January to launch their own bids.

Jeremy Batstone-Carr, analyst at Charles Stanley, said Nestlé's decision leaves Kraft as the "overwhelming frontrunner" in the battle for Cadbury.

"Nestle's decision effectively removes Ferrero and Hershey from the field as competitive forces, although we do not altogether rule out the possibility that Cadbury and Hershey might form a defensive alliance against a reinvigorated Kraft," Batstone-Carr said. He added that the fall in the value of Cadbury's shares suggested that stock market traders rate its survival prospects as "50:50".