Kraft results to trigger Cadbury deal countdown

Kraft made its $16.5 billion (10 billion pound) cash and stock offer for British chocolatier Cadbury on September 7. Kraft Chief Executive Irene Rosenfeld has since held back on further moves and her waiting game has paid off as no rival bidder emerged and Cadbury shares retreated.

Kraft reports third-quarter earnings on Tuesday and people familiar with the matter have said not to expect new manoeuvres beforehand.

However, the company faces a November 9 deadline to put in a formal bid under a UK Takeover Panel ruling, leaving a narrow window of time to make an approach to Cadbury.

Kraft said the company would focus on discussing its earnings results on Tuesday and not comment on Cadbury. But for investors on both sides of the fence, the numbers themselves will do a lot to tip Kraft's hand on whether, and by how much, it might increase its offer.

"That will likely affect the stock price, which affects the bid," said one source familiar with the matter, who was not authorized to speak on the record. "Any talk of altering the bid is premature until you see how earnings come out and how the stock performs. You have to take step one before you take step two."

Kraft is expected to post earnings of 48 cents a share for the quarter, up from 44 cents a year earlier, according to the average of analysts' estimated compiled by Thomson Reuters I/B/E/S. Much of the improvement is likely due to falling commodity prices and cost-cutting, which have helped Kraft counter declining sales.

One shareholder who owns stock in both companies expects Kraft to post strong earnings, with the company hoping its stock rises as high as $30, and then make its revised bid for Cadbury. Kraft shares closed at $27.55 on Thursday.

SHRINKING PREMIUM

On the day Kraft disclosed its informal bid, Cadbury shares shot up 38 percent and hit an all-time high of 808 pence, representing an 8.5 percent premium to the offer at the time.

Industry analysts said Kraft may need to offer as much as 850 pence to 900 pence to seal a deal, particularly if it needs to fend off interest from rivals like Hershey or Nestle .

But hopes of much higher offers have waned in the last week as Hershey and Nestle remain silent on any potential interest.

Since then, the premium built into Cadbury shares has shrunk to about 5.4 percent and some of its investors say Kraft could succeed with an offer closer to 820 pence.

Cadbury shares closed at 773.36 pence on Thursday, while the Kraft offer is currently valued at 731.2 pence.

Rosenfeld still must show Cadbury's shareholders that Kraft has the growth prospects to make its shares worthwhile in her biggest gambit since taking the CEO role in 2006. Cadbury Chairman Roger Carr dubbed Kraft a "low growth conglomerate" in his letter to Rosenfeld rejecting the initial offer.

She also needs to impress upon Kraft shareholders that the company can post solid returns on its own if it does not acquire Cadbury and its faster-growing confectionery business, which includes expansion in emerging markets like India.

"A lot of it, frankly, is going to be posturing and showing confidence in the fact that they can be a growth-geared company and not this stigma that some people are putting on them of being a low-growth conglomerate company," said Edward Jones analyst Matthew Arnold.

(Additional reporting by Victoria Howley in London and Jessica Hall in Philadelphia; Editing by Michele Gershberg and Matthew Lewis)