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A Sweet Offer: Kraft To Buy Candymaker Cadbury For $19.5 Billion

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LONDON — After months of fierce resistance, Cadbury's about-face to accept a sweetened 11.5 billion pound ($19.5 billion) takeover from Kraft Foods Inc. – forming the world's biggest candy company – has alarmed British unions, lawmakers and chocolate lovers.

With Cadbury shareholders expected to agree to the deal and a rival bid from The Hershey Co. looking less likely, opponents fear the U.S. multinational's impact on one of Britain's oldest and best-loved brands.

Just days after Cadbury declared its suitor a "low growth" company with a "long history of underperformance," the British maker of Dairy Milk chocolates and Dentyne gum capitulated to a raised bid of 840 pence ($13.78) per share.

The deal, comprising 500 pence cash and 0.1874 new Kraft shares for each Cadbury share, is a 9 percent premium to its previous 770 pence offer and 50 percent higher than Cadbury's market value before Kraft, based in Northfield, Illinois, went public with its approach in September.

Cadbury stock was trading just under that level, at 836.5 pence, up 3.6 percent, in Tuesday afternoon trade. Shares in Kraft, the maker of Toblerone chocoloate, Velveeta processed cheese and Oreo cookies, were down 2.5 percent at $28.85.

The combination of the pair would create the world's biggest confectionary company, replacing Mars Inc., and Kraft CEO Irene Rosenfeld said the deal provides "both immediate value certainty and upside potential" as she tried to appease concerns about the loss of Cadbury's iconic status.

The company's roots go back to the grocery store opened in 1824 by John Cadbury in Birmingham, central England. A Quaker, Cadbury believed cocoa and drinking chocolate were healthy alternatives to alcohol, considered to add to the miseries of the working class.

The popular Dairy Milk bars were launched in 1905 as a challenge to dominant Swiss chocolate makers.

"We have great respect for Cadbury's brands, heritage and people," Rosenfeld said. "We believe they will thrive as part of Kraft Foods."

But unions are worried there were no clear guarantees from Kraft that it won't switch manufacturing of some of the 186-year-old company's chocolates to eastern Europe, sacrificing thousands of British jobs.

"This is a very sad day for U.K. manufacturing. A successful, iconic, independent U.K. brand will now be owned by a giant company with massive debt," said Jennie Formby of the Unite union, which had campaigned against Kraft's offer.

"We have very real fears about how Kraft will repay its debt, particularly as it has ratcheted it up still further in order to purchase Cadbury," she added.

Four Labour Party lawmakers, whose electorates cover two key factories in Britain's manufacturing heartland, said in a joint statement they were worried "about the kind of future that Cadbury's would have as part of this giant multinational whose corporate priorities are decided a long way away from the West Midlands."

The deal, one of the largest transnational takeovers since the credit crunch, is further sign that food companies are seeking to gain scale by combining, after Mars bought William Wrigley Jr. Co. in 2008 for $23 billion.

A Kraft-Cadbury combination will create a portfolio with more than 40 confectionary brands, each with annual sales in excess of $100 million.

Kraft, attracted by Cadbury's extensive reach in lucrative emerging markets, sidestepped concerns from its own major shareholders by reducing the share portion of the deal below 20 percent – negating the need for it to be approved by shareholders.

Billionaire investor Warren Buffett, whose Berkshire Hathaway is Kraft's biggest shareholder, voted against Kraft's proposal earlier this month to issue more shares to fund the takeover bid. Kraft made the proposal after raising the cash portion of its offer by selling its North America pizza business to Nestle for $3.7 billion.

Under the revised offer, Kraft will issue 265 million new shares representing approximately 18 percent of the existing issued share capital and 15 percent of the company's enlarged issued share capital.

There was surprise at the overnight change in tune from Cadbury Chairman Roger Carr, who had led a spirited defense against Kraft, talking up the British company's standalone strengths, over the past four months.

The man who earlier this week said Rosenfeld's shareholders had been forced to deal with "repeated disappointment from a management team who have promised much and delivered less," told his own shareholders on Tuesday that the revised deal "represents good value."

"Although we always considered that 850 pence could be enough to win shareholder support we have to admit surprise at how meekly Cadbury has apparently acquiesced," said Jeremy Batstone-Carr, analyst at Charles Stanley & Co.

Only last week, Batstone-Carr added, the Cadbury chairman "had confidently predicted that the company's share price could be over 10 pounds (1,000 pence) in due course."

Analysts said it was likely that Cadbury shareholders would follow Carr's advice, despite earlier suggestions that they'd hold out for a higher offer.

David Cumming, head of U.K. equities at Cadbury shareholder Standard Life, had said Monday that Kraft needed to aim above 900 pence to secure support from long-term shareholders. But on Tuesday, he signaled the fight was over.

"I probably won't go against the view of Cadbury's management," he told the BBC. "Kraft are getting a good deal. It's sad that Cadbury is gone, but business is business."

The U.K. Takeover Panel has set a deadline of Feb. 2 for acceptances.

There was also declining speculation about a rival offer after Ferrero and Nestle dropped out of the race, leaving just The Hershey Co. as a contender to meet a British regulatory deadline of 7 a.m. (0200 GMT) Monday to make a bid.

"The likelihood of Hershey throwing its hat into the ring looks remote, given the required level of debt which the group would have to support," said Keith Bowman, Equity Analyst at Hargreaves Lansdown Stockbrokers.

Kraft said it did not plan full dual listings for the combined company in New York and London, but it would retain a secondary listing for British investors to trade their shares in Europe.

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