Kraft may need 850-900 pence to swallow Cadbury

US food giant Kraft could raise its bid by 20 per cent to £12.3 billion to seal a takeover deal for Britain's Cadbury without losing a key investment grade rating on its debt.

Cadbury immediately rejected Kraft's bid, launched on September 7, which then valued Cadbury at 745 pence a share, but analysts believe the world's second largest food group could, if needed, bid 850-900p to swallow the Dairy Milk chocolate and Trident gum group.

With a counterbid seen as unlikely, the phoney war between Kraft and Cadbury could go on for weeks, with Kraft leaving time to put pressure on Cadbury's board to talk, and Cadbury reluctant to engage without a better formal offer on the table.

Comments by Kraft's biggest shareholder, billionaire investor Warren Buffett, have led to speculation that US chocolate maker Hershey may join Kraft to help fund the Cadbury bid and break up the spoils between them.

"We believe at a price of 860p Kraft can increase the cash component of the transaction to at least 65 per cent, and maintain an investment grade rating," said analyst David Tovar at Bank of America/Merrill Lynch.

Credit Suisse's Robert Moskow says Kraft has communicated with the debt rating agencies, and it sounds as if they are comfortable with what it has presented so far.

"We believe Kraft has a lot of leeway with the agencies to increase its bid," said Moskow, who believes Kraft will need to pay 850-875p to win the battle for the confectionery group.

Sanford Bernstein suggests Kraft might have the flexibility to raise its bid up to 900p. Analyst Andrew Wood said: "We consider that Kraft will need to increase its offer up to 900p in order to stand a good chance of getting the deal done."

Kraft's bid of 40 per cent cash and the rest in new Kraft shares initially valued Cadbury at £10.2 billion, but a fall in Kraft shares puts the current value at 720p or £9.9 billion, compared to the current share price of 786-1/2p.

Rating agency Fitch puts Kraft's debt on a BBB rating, two notches above junk status, where raising money becomes very expensive, while S and P has Kraft on BBB+, and both placed Kraft on a negative rating watch after the bid was announced.